Can Creditors Claim Living Trust Assets

Emily just received the devastating news. Her mother, Patricia, passed away last month, and Emily was named successor trustee of her meticulously crafted living trust. For years, Patricia proudly explained how the trust would shield her assets from creditors and probate. Now, a collection agency is threatening to sue the trust, claiming a debt from a medical bill Patricia incurred before her death. Emily is frantic – she thought the whole point of the trust was to prevent this. She’s facing not only the emotional weight of loss but also the potential of losing assets intended for her family, and the legal fees are already piling up.

As an estate planning attorney and CPA with over 35 years of experience here in Moreno Valley, I see this scenario far too often. People are misled into believing a living trust is a fortress, impenetrable to all claims. While trusts offer significant benefits, particularly avoiding probate, they aren’t a magical shield against all creditors. The rules are complex, and understanding them is crucial to protecting your family’s legacy.

What Exactly Does a Living Trust Do?

A revocable living trust allows you to manage your assets during your lifetime and transfer them to your beneficiaries after your death, bypassing probate court. This saves time, expense, and keeps your affairs private. However, because you retain control of the trust assets while you’re alive, they generally remain accessible to your creditors. Think of it this way: the trust is an extension of you, and your creditors can reach assets you control.

When Can Creditors Make a Claim Against a Trust?

Creditors typically have two primary avenues for pursuing claims against a trust: either debts incurred before your death, or those incurred by the trust itself after your death. Pre-death debts fall under the scrutiny of the probate court, even if the assets are held in a trust. The probate court appoints a personal representative to oversee the estate and ensure all debts are settled before assets are distributed. Creditors can file claims against this estate, including assets within your living trust.

Timing is Critical: Probate Code § 9100 dictates that creditors have a strict window to file a claim: either 4 months after Letters are issued or 60 days after notice is mailed (whichever is later). Once this period expires, unfiled claims are generally forever barred, protecting the heirs.
Notice Requirements: Probate Code § 9202 states the executor has a mandatory duty to send specific notice to the Franchise Tax Board, Victim Compensation Board, and Medi-Cal (DHCS) within 90 days of appointment. Failure to notify these agencies pauses their statute of limitations, allowing them to claw back assets years later.
Trust-Incurred Debts: If the trust itself incurs debts after your death (e.g., ongoing property taxes, repairs), those debts must be paid from trust assets before distributions to beneficiaries.

What Debts Are Typically Protected?

While creditors can pursue claims, certain debts receive higher priority. This is where my CPA background is invaluable. Understanding the ‘step-up’ in basis for inherited assets—where the cost basis is reset to the fair market value at the time of death—can significantly minimize capital gains taxes for beneficiaries. Properly valuing assets is also key to maximizing tax benefits.

Administration Expenses: These include executor fees, attorney fees, and court costs.
Funeral Expenses: These are generally given top priority.
Family Allowance: A small amount of money may be allocated to the surviving spouse and dependents for their immediate needs.
Wage Claims: Unpaid wages earned before death have priority.
General Debts: Credit card debt, personal loans, and other general debts are typically lower priority. Probate Code § 11420 details this hierarchy.

What Happens if a Claim is Disputed?

If an executor or trustee rejects a creditor’s claim, the creditor has a limited time to act.

90-Day Rule: The 90-Day Suit Window (Probate Code § 9353) stipulates that if an executor rejects a creditor’s claim (using Form DE-174), the creditor has exactly 90 days to file a lawsuit in civil court. If they fail to sue within this window, the claim is legally dead.
Interest Accrual: Remember that debts bear interest from the date of death (or the date the claim is allowed) at the rate of 10% per annum (unless the contract specifies otherwise) according to Probate Code § 11423. Delaying payment unnecessarily drains the inheritance.

What About Creditor Claims Against Beneficiaries?

This is a crucial distinction. While a creditor generally can’t reach assets within a trust that haven’t been distributed, they can pursue the beneficiary’s share after distribution. This is especially true if the beneficiary is solely owned. However, certain protections may be available, such as asset exemptions in bankruptcy.

Can a Trustee Avoid Creditor Claims Altogether?

For trusts created to avoid probate, the Optional Trust Claims Procedure (Probate Code § 19000) allows the trustee to proactively invite creditor claims. This essentially creates a mini-probate period where creditors are notified and given a chance to file claims. While optional, it can provide a clean break, cutting off potential liability after 4 months. Without it, creditors can theoretically sue the trust beneficiaries for up to 1 year after death (CCP § 366.2). It’s a strategic decision we discuss with every client.

Ultimately, a living trust is a powerful tool, but it’s not a panacea. A proactive approach—clear communication with beneficiaries, meticulous record-keeping, and a thorough understanding of creditor rights—is essential to preserving your family’s financial future.

How do enforcement rules in California probate court shape outcomes for heirs and fiduciaries?

California probate is designed to provide court-supervised transfer of property, yet cases often break down when authority is unclear, required steps are missed, or disputes arise over assets, notice, and fiduciary conduct. When the process is misunderstood, families can face avoidable delay, escalating conflict, and increased exposure to creditor issues, hearings, or litigation before the estate can close.

To manage the estate’s value, separate property types by learning what counts as a probate asset, confirm exclusions through non-probate assets, and support valuation steps with probate inventory requirements to reduce disagreements about what is in the estate.

A stable probate administration outcome usually follows from clarity, consistency, and readiness for court review, especially when multiple stakeholders and competing interpretations are involved. When documentation supports enforcement and timelines are respected, families are less likely to face preventable escalation.

Verified Authority on Probate Creditor Claims

• The Creditor Window (4-Month Rule): California Probate Code § 9100
  This statute provides the primary protection for the estate. Generally, any creditor who fails to file a formal claim within four months of the executor receiving Letters is barred from collecting. This “clean break” is one of the main advantages of formal probate.
• Mandatory Notice to Public Agencies: California Probate Code § 9202
  Regular creditors aren’t the only concern. You MUST send specific notices to the Director of Health Care Services (Medi-Cal), the Franchise Tax Board, and the Victim Compensation Board. Missing this step keeps the liability window open indefinitely for the state.
• Priority of Payments: California Probate Code § 11420 (Debt Hierarchy)
  If an estate is “insolvent” (debts exceed assets), you cannot simply pay bills as they arrive. This code establishes the strict pecking order: funeral expenses and administration costs (lawyer/executor fees) get paid before credit cards and medical bills.
• Rejection of Claim (The “Sue or Lose It” Rule): California Probate Code § 9353
  When an executor formally rejects a claim (Form DE-174), the clock starts ticking. The creditor has exactly 90 days to file a civil lawsuit to enforce the debt. If they miss this deadline, the claim is barred, regardless of its validity.
• Personal Liability of Executor: California Probate Code § 9601
  An executor can be held personally liable for “breach of fiduciary duty” if they pay debts out of order (e.g., paying a credit card before the funeral home) or distribute assets to heirs before clearing all valid creditor claims.
• One-Year Statute of Limitations (Non-Probate): California Code of Civil Procedure § 366.2
  This is the ultimate backstop. Even if no probate is opened, creditors generally only have one year from the date of death to file a lawsuit against the decedent’s successors (e.g., trust beneficiaries). After one year, most debts expire automatically.