What happens to a person’s debts after death? Each state handles this problem a little differently. This article looks at how debts are handled in California in the following situations:
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Debts when legalization 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 that your family does not put yourself in a difficult situation
In California, most debts are handled through probate. An estate process is a legal action for the administration of the estate of a deceased. When probate is initiated, the executor must contact a decedent’s known creditors directly. A notice to creditors must also be published in a newspaper of general circulation. Creditors have four months after the issuance of the letters to the executor to present their claims. If the notification requirements are met and creditors do not file their claims within the four-month period, then these debts may lapse. Validly submitted claims can be accepted or rejected by the personal representative of the estate. Debts are paid out of the decedent’s estate prior to distribution under the decedent’s will or intestate laws.
When probate is not required, there is no legal obligation to contact creditors directly or to serve creditors in a general circulation court. This is the case when individuals fund assets, which would otherwise have been subject to probate, in a revocable living trust. In such a case, the creditor must act himself 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 for claims against a decedent’s estate. Consequently, claims that are not filed 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 administration of estates or trusts prior to distribution to beneficiaries. The executor or trustee will be responsible for the payment of the debt and not the individual beneficiaries. However, there is an exception when an asset is left to a beneficiary subject to indebtedness. At the same time, the beneficiary could always renounce the gift, in which case it would pass to the other beneficiaries according to the decedent’s succession plan or ultimately renounce the status.
Note that in the case of real estate subject to indebtedness that passes to a spouse or child, federal law (Garn-St. Germain Depository Institutions Act of 1982) provides that a “payment on sale” clause under a deed of trust will not be 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 interference in their private lives by the state. Notification and publication requirements do not exist if legalization is never initiated 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 meet the payment of debts in the event of death.