What happens to a person’s debts after death? Each state handles this problem a little differently. This article looks at how debt is handled in California in the following situations:
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Debts when succession is required
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Debts when assets are held in a revocable living trust
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Situations in which someone can be held responsible for debts after your death
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How you can get your finances in order before you die so your family isn’t in a tough spot
In California, most debts are handled in probate. A succession procedure is a legal action for the administration of the estate of a deceased. When starting an estate, the executor must contact known creditors of a decedent directly. A notice to creditors must also be published in a newspaper of general circulation. Creditors then have four months after the letters are sent to the executor to file their claims. If the notification requirements are met and creditors do not file their claims within the four-month period, these debts become time-barred. Validly filed claims may be accepted or denied by the personal representative of the estate. Debts are paid from the decedent’s estate prior to distribution under the decedent’s will or intestate succession laws.
When probate is not required, there is no legal obligation to contact creditors directly or to file notice to creditors in a court of general circulation. This is the case when individuals fund assets, which would otherwise have been subject to probate, into a revocable living trust. In such a case, the creditor must take steps to file an estate or sue the trustee of the revocable living trust directly. In all cases in California, there is a one-year statute of limitations on claims against the decedent’s estate. Consequently, claims that are not brought by creditors against a decedent’s estate generally lapse and cannot be collected.
Generally, all debts of a decedent will be paid at the time of probate or trust administration prior to distribution to beneficiaries. The executor or trustee will be responsible for the payment of the debt, and not the individual beneficiaries. However, an exception exists when an asset is left to a beneficiary subject to indebtedness. At the same time, the gift could always be waived by the beneficiary, in which case it would either pass to the other beneficiaries under the decedent’s estate plan, or ultimately revert to the state.
Note that in the case of indebted real estate passing to a spouse or child, federal law (Garn-St. Germain Depository Institutions Act of 1982) provides that a “due on sale” clause under a trust deed will not be valid. motivated. As such, real estate can be left to a spouse or children subject to the terms of an existing loan.
We recommend that people run comprehensive estate plans that address debt repayment. By transferring assets to a revocable living trust, clients in California will avoid unnecessary intrusion into their privacy by the state. Notice and publication requirements do not exist if an estate is never commenced in California. As a result, a living trust results in substantial privacy and debt collection benefits compared to a will alone. People should also consider purchasing life insurance to help pay off debts in the event of death.