BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2015 - 2016 Regular Session
SB 785 (Morrell)
Version: April 6, 2015
Hearing Date: May 5, 2015
Fiscal: No
Urgency: No
TMW
SUBJECT
Estates and trusts: creditor's claim
DESCRIPTION
This bill would clarify the definitions of "probate estate" and
"trust estate" for purposes of filing a petition by a trustee
for the payments of claims, debts, and expenses from a revocable
trust of the deceased settlor.
BACKGROUND
As part of a person's estate planning, he or she may create a
trust into which the person transfers specified property.
Trusts are commonly used to avoid probate of the person's estate
upon the person's death and may provide certain tax advantages
relative to the property. There are two types of trust estate
plans; a testamentary trust, which is written into a will and
becomes effective upon death, and a living or inter vivos trust,
which is created by a separate document. There are two types of
inter vivos trusts, revocable and irrevocable. Unlike an
irrevocable trust, a revocable trust allows the person creating
the trust, referred to as the settlor, to instruct the trustee
to pay over all or any portion of the trust property, revoke,
alter, and amend the trust.
Multiple settlors may create one revocable trust, and married
persons commonly create a joint revocable trust, which allows
the surviving spouse to alter or amend the trust after the other
spouse's death or revoke, or terminate, the trust and distribute
the trust property. A joint revocable trust may contain the
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spouses' community property and separate property.
Assets in a revocable trust at the settlor's death are available
to raise cash to pay estate taxes, administration expenses and
debts immediately after death, without waiting for a probate
decree or issuance of preliminary letters. If the trust is
funded prior to death, the property in the trust remains in the
trustee's name before and after the death and is immediately
available for liquidation should the need arise.
After the death of the settlor (or decedent), existing law
authorizes the trustee to handle the claims of creditors against
the property of a revocable trust. These procedures authorize
the trustee to act even though the decedent's estate has not
been administered in probate. Probate administration is a
proceeding through which the court supervises the disbursement
of a decedent's real and personal property. The probate estate
is that part of the decedent's property that is subject to
administration in probate. The trust estate is the portion of
the decedent's property that is titled in the name of the
trustee of the deceased settlor's trust. This bill would
clarify the definitions of and references to "trust estate" and
"probate estate" in relation to a trustee's handling of creditor
claims for which the trust may be liable.
CHANGES TO EXISTING LAW
Existing law provides that title to a decedent's property,
subject to probate administration and the rights of
beneficiaries, creditors, and other persons as provided by law,
passes on the decedent's death to the person to whom it is
devised in the decedent's last will or, in the absence of such a
devise, to the decedent's heirs as prescribed in the laws
governing intestate succession. (Prob. Code Secs. 7000, 7001.)
Existing law provides that if the settlor retains the power to
revoke the trust in whole or in part, the trust property is
subject to the claims of creditors of the settlor to the extent
of the power of revocation during the lifetime of the settlor.
(Prob. Code Sec. 18200.)
Existing law provides a process by which a trustee of a deceased
settlor's revocable trust may petition the court for the payment
of claims, debts, and expenses from the revocable trust to a
creditor. (Prob. Code Sec. 19000 et seq.)
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This bill would clarify the terms "probate estate" and "trust
estate" for purposes of that petition process.
This bill would define "probate estate" to mean a decedent's
estate subject to administration, as specified, and would define
"trust estate" to mean a decedent's property, real and personal,
that is titled in the name of the trustee of the deceased
settlor's trust or confirmed by order of the court to the
trustee of the deceased settlor's trust.
This bill would make conforming changes in the Probate Code.
COMMENT
1. Stated need for the bill
The author writes:
The provisions of the Probate Code relating to creditor claim
procedures against estates held in trust currently do not
specify where and under what circumstances the terms "deceased
settlor's estate" and "estate of the deceased settlor" refers
to a decedent's probate estate, and when the reference to
"estate" refers to the decedent's trust estate.
This uncertainty leads to confusion by creditors, attorneys
representing creditors, and some inexperienced judicial
officers - which confusion leads, in turn, to misapplication
of the law, which can result in additional, wasteful
litigation. Providing a clear definition and specifying in the
code what type of estate - probate or trust - is being
referenced will help avoid this misapplication and unnecessary
litigation.
SB 785 would provide a clear definition of "probate estate"
and "trust estate" in Probate Code [Section] 19000, the
definitional section in the Part relating to trust creditor
claims, and updates the subsequent code sections in the Part
to specify which type of estate is meant in each.
2. Clarifying references to type of estate
Existing law provides that, upon the death of the settlor, his
or her property that was subject to the power of revocation
(ability of settlor to cancel the transfer of property to the
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trust) at the time of his or her death is subject to the claims
of creditors of the deceased settlor's estate and to the
expenses of administration of the estate to the extent that the
deceased settlor's estate is inadequate to satisfy those claims
and expenses. (Prob. Code Sec. 19001.) Existing law authorizes
the trustee of a revocable trust to petition the court to
determine the liability of the trust for payment of creditor's
claims against the estate (creditor claim process). (Prob. Code
Sec. 19000 et seq.)
According to the sponsor, Conference of California Bar
Associations (CCBA), the creditor claim process has multiple
references to the "deceased settlor's estate" and "estate of the
deceased settlor," but these terms are ambiguous because there
are two types of estates involved: the "probate estate" and the
"trust estate." The probate estate is comprised of property
held in the decedent's name or in which the decedent has an
interest and is typically the first resource from which to draw
to pay creditor claims. The trust estate contains property
transferred by the deceased settlor to the trust, held in the
name of the trustee on behalf of the trust, and which property
may be used to pay creditor claims.
CCBA contends that creditors, attorneys, and some inexperienced
judicial officers are confusing the two types of estates at
issue when interpreting the "deceased settlor's estate or
"estate of the deceased settlor." By providing clear
definitions of probate estate and trust estate and making
conforming revisions within the code sections pertaining to the
creditor claim process, this bill seeks to remove uncertainty,
rectify misapplication of the law, and eliminate wasteful
litigation that may result from the misuse of the existing
ambiguous terms.
Support : Executive Committee of the Trusts and Estates Section
of the California State Bar; Judicial Council of California
Opposition : None Known
HISTORY
Source : Conference of California Bar Associations
Related Pending Legislation : None Known
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Prior Legislation :
AB 341 (Spitzer, Chapter 159, Statutes of 2007), among other
things, harmonized separate Probate Code provisions for creditor
claims against a trust and against an estate in probate, such as
provisions for notice to creditors, statutes of limitations for
filing creditors' claims, and allowance for late claims.
AB 2751 (Kaloogian, Chapter 862, Statutes of 1996), among other
things, clarified whether creditor's claims to a trust may be
accrued or not accrued.
SB 727 (Calderon, Chapter 992, Statutes of 1991) enacted
provisions relating to the payment of claims, debts, and
expenses from the revocable trust of a deceased settlor,
specifically with respect to the filing of a petition for
approval and settlement of claims, the publication and provision
of notice to creditors, the filing of claims, the allowance and
rejection of claims, the establishment of claims by money
judgments, the allocation of debts between the trust and the
settlor's surviving spouse, and the liability of the surviving
spouse of the settlor.
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