Typically, debts are satisfied through probate proceedings, but if a decedent’s assets are held in a trust, additional legal hurdles may arise. Specifically, the optional “trust claims procedure” under Probate Code sections 19000 et seq. allows trustees to invite creditors to make claims against trust property, providing a structured process similar to probate but specific to trusts. However, this optional procedure is rarely invoked by trustees, so creditors must learn about the decedent’s death and enter a timely creditor claim to ensure the debt is paid.
Spears v. Spears: A New Path for Creditor Claims Against Trusts — or Just a Detour?
The recent appellate ruling in Spears v. Spears deviates from the prevailing understanding amongst trust and estate attorneys that a timely filed creditor’s claim in an estate proceeding is a prerequisite to recovering on a claim. Instead, the court in Spears held that, when there is no probate proceeding pending (and the trustee elects not to use the optional trust claims procedure), a creditor may sue to recover a decedent’s debts directly from the decedent’s revocable trust estate — without first filing a claim in probate.
This ruling raises critical questions for trust and estate practitioners, as it potentially broadens the ability of creditors to reach trust assets, while sidestepping established probate procedures.
How Does the Traditional Creditor Claims Process Work?
Under California law, creditor claims against a decedent’s assets are typically processed through the probate process. When a person dies, their estate is subject to the creditor claims procedure under Probate Code sections 9000-9399.
Creditors must file their claims within a specific statutory timeframe, generally within four months after a personal representative is appointed (Prob. C. § 9100) or within one year of the decedent’s death (Code Civ. Proc. § 366.2). If a claim is rejected, the creditor must file a lawsuit within 90 days to enforce it, making probate a structured and time-sensitive process for debt resolution (Prob. C. § 9353).
That said, it’s important to note that probate is not required for all deceased persons, as assets can pass through non-probate transfers, such as trusts — a common estate planning tool in California that’s intended to bypass probate.
How Does the Optional Trust Claims Procedure Work?
If a decedent’s assets are held in a trust rather than a probate estate, the process becomes more complex. Unlike probate estates, trust administration does not have a mandatory creditor claims procedure. Instead, trustees have the option to invoke what is often referred to as the optional “trust claims procedure” under Probate Code sections 19000-19403.
This procedure allows a trustee to publish a notice to creditors, setting a deadline for claims. If the trustee does not follow this process, creditors must determine whether to open probate to file a claim against the decedent or enforce their claims through other legal avenues, such as litigation against the trustee or beneficiaries.
Historically, it has been widely understood that when a trustee does not utilize the optional trust claims procedure, a creditor must first attempt to recover from the decedent’s probate estate before turning to trust assets. However, the court’s ruling in Spears v. Spears challenges this assumption, potentially creating new avenues for directly submitting creditor claims against trusts.
Spears v. Spears: Case Background
Brian Spears, the son of James Spears, filed a petition seeking to be named as a creditor of his late father’s trust, remove his stepmother, Therese Spears, as trustee, and obtain a trust accounting.
Brian, who filed his petition while incarcerated, alleged that Therese personally owed him $40,000 based on two alleged oral agreements and that his father’s trust was liable for the debts as community property debt.
Therese challenged the petition on multiple grounds via demurrer, arguing: 1) that Brian lacked standing for certain relief requested after receiving his $1,000 bequest under the trust; 2) that the alleged debts were personal liabilities rather than obligations of the trust; and 3) that Brian had not described the agreements with sufficient specificity.
At the hearing, Brian conceded that he had received his $1,000 bequest and only contested Therese’s demurrer as to his creditor’s claim. The trial court sustained Therese’s demurrer with leave to amend, thereby allowing Brian to amend his petition to provide the required specificity.
Brian subsequently filed a document labeled “Creditor’s Claim,” asserting the same two breaches of oral agreement previously alleged and including the requested specificity. Therese again objected by demurrer to Brian’s “Creditor’s Claim” document, this time alleging that Brian was required to file his claim against the decedent’s estate, not the trust, and that his claims were barred by the statute of limitations and statute of frauds.
The trial court sustained Therese’s demurrer with leave to amend and ultimately dismissed the matter with prejudice following a determination that Brian had failed to file an amended pleading.
Brian appealed, contending that his filing of the document titled “Creditor’s Claim” satisfied the court’s order and that the dismissal was improper. The appellate court agreed with Brian that his “Creditor’s Claim” document should have been considered an amended pleading, as the filing added the specificity required by the trial court and was submitted under the same case number, demonstrating Brian’s intent to pursue his claim.
In response, Therese offered several alternative rationales for affirming the trial court’s order of dismissal; however, her argument that Brian was required to bring his action against the estate and not the trust is most relevant to our purposes here.
Must Creditors Bring Claims Against an Estate Prior to Pursing Trust Assets?
On appeal, Therese argued that Brian was required to bring his claim against James’s estate before seeking recovery from the trust. She argued the prevailing view among trust and estate practitioners: When a trustee does not invoke the optional trust claims procedure, a creditor must first obtain a judgment against the personal representative of the settlor’s estate. Only if the estate lacks sufficient assets may the creditor then pursue the trust for payment.
Thus, Therese argued that because she never pursued the optional trust claims procedure, and because Brian did not file a claim against James’s estate within the one-year statute of limitations under Code of Civil Procedure 366.2, Brian’s claim was time-barred. Therese cited two main authorities to make this argument.
How Does CCP 377.40 Apply to Claims Against Trusts?
First, Therese cited Code of Civil Procedure section 377.40, which states that a cause of action against a decedent that survives may be asserted against the decedent’s personal representative or, to the extent provided by statute, against the decedent’s successor in interest.
However, the court reasoned that, under Code of Civil Procedure section 377.11, a successor in interest includes someone who inherits a cause of action or property, which aligns with Probate Code sections 19400 and 19402 that establish the trustee and trust beneficiaries as the decedent’s successors in interest to trust property when no probate estate is opened.
Does the Arluk Decision Make Trust Beneficiaries Personally Liable for Unsatisfied Judgments Against Estates?
Second, Therese cited Arluk Medical Center Industrial Group, Inc. v. Dobler (2001) 89 Cal.App.4th 530 in which the court held that, if no probate proceeding is opened and the trustee does not elect to use the optional trust claims procedure, a beneficiary who receives distributions from a trust may be personally liable for any unsatisfied judgment obtained by a creditor against the decedent’s estate.
However, the appellate court in Spears questioned whether Arluk accurately applied these principles, noting that requiring creditors to obtain judgments against an estate before proceeding against a trust would be impractical when no probate estate exists. Furthermore, Arluk itself involved a situation where a probate estate was opened and a judgment was obtained against the estate before trust assets were pursued.
As such, the appellate court in Spears contended Arluk’s broader statements about creditor claims against trusts were mere dicta rather than binding precedent.
Spears Court Potentially Sets New Precedent for Filing Creditor Claims Against Trusts
Ultimately, the appellate court in Spears deviated from prior case law and held that a creditor is not required to first file a claim in probate before pursuing trust assets.
In its reasoning, the court cited Probate Code section 19400, which states that, if no probate estate is opened and the trustee does not pursue the optional trust claims procedure, a beneficiary of the trust can become personally liable for unsecured creditors’ claims of the deceased settlor’s probate estate.
In other words, when there is no probate, creditors may still have a way to get paid — either by going after the trust itself or the beneficiaries.
The court also cited Probate Code section 19402, which clarifies that a beneficiary is personally liable “only to the extent the claim of the creditor cannot be satisfied out of the trust estate.” As such, while Brian claimed in his briefing that the estate here was insolvent because James, the decedent, transferred all his assets to the trust, the court reasoned that Section 19402(b) “implicitly requires a creditor in these circumstances to seek relief against the trust before pursuing any trust beneficiary.”
Thus, taken together, the court held that Brian had authority to assert a claim against Therese, as trustee of the trust, and to seek to recover assets of the trust.
Additionally, the court noted that Brian may have alternatively filed his claim pursuant to Probate Code section 850(a)(3)(A) or (C), whereby an interested person may file a petition requesting an order transferring property into a trust or estate where the trustee is in possession of or holds title to property of another, or where the property of the trust is claimed to be subject to the settlor of the trust.
Key Takeaways: A New Standard for Creditor Claims Against Trusts or a One-Off Decision?
The Spears ruling represents a significant departure from conventional wisdom in trust and estate law. By allowing a creditor to proceed directly against trust assets without first pursuing probate, the decision raises concerns about how trustees should handle creditor claims and whether this interpretation will be applied consistently in future cases.
- Creditors May Have a Direct Path to Trust Assets — If a trustee does not invoke the optional trust claims procedure and no probate estate is opened, creditors may be able to pursue trust assets without first seeking probate relief. However, it remains unclear whether future courts will follow this reasoning.
- Trustees Face New Uncertainty in Handling Claims – Without a firm requirement for probate, trustees may face increased risks of litigation from creditors seeking recovery from trust assets, potentially altering the calculus for trust administration and risk management. The ruling raises concerns about when and how trustees should withhold distributions to protect against potential claims, particularly given that trustees are generally not obligated to preserve trust assets for disputed creditor claims.
- The Role of Probate in Trust Creditor Claims May Be Shifting – The ruling challenges longstanding assumptions that probate is a prerequisite to trust creditor claims. Whether this is a permanent shift remains to be seen.
- Future Litigation Will Be Key – While Spears provides a potential new path for creditors, its broader impact will depend on how future courts interpret and apply this decision.
For now, the Spears decision signals a possible shift in how trust creditor claims are handled in California, but whether this ruling will stand the test of time — or be clarified or limited by future decisions — remains an open question.
Still have questions about the creditor claim process?
Navigating the creditor claim process can be complex and time-sensitive. Whether you’re filing or contesting a claim, our skilled probate attorneys have the expertise to protect your interests. Call us today to discover how we can help.
