Friday, 19 April 2024

Estate planning: Surviving spouse and creditor claims of the deceased spouse

The surviving spouse of a decedent owing large debts will want to limit how much such debts reduce the decedent’s assets left to the surviving spouse and the surviving spouse’s own assets.


California law provides that a surviving spouse is personally liable for all of the separate debts of the deceased spouse up to the amount of the couple’s community property assets and any separate property of the decedent received by the surviving spouse without probate.


Under California law, creditors generally have one year from the date of death to file a timely claim against a decedent’s estate. Due process under the US Constitution, however, allows creditors to receive notice and an opportunity to file a claim. California’s law may, therefore, be unconstitutional as to creditors who neither receive notice nor know about the debtor’s death.


Delaying the estate administration, if possible, until after one year may be advantageous. If the creditor does not open a probate and file a claim within the year, then they may be out of luck.


Is the debt the decedent’s separate property debt or a community property debt?


If the surviving spouse is not the decedent’s sole beneficiary, the following rules are more important. First, if separate property debts cannot be fully paid from the decedent’s own separate property, the deficiency is chargeable to the couple’s community property (beginning with the decedent’s one-half share).


Second, community property debts are primarily chargeable against the community property assets. After exhausting the community property, any unpaid deficiency is divided equally between the spouses’ separate property estates. If the decedent’s separate property is not enough to pay such deficiency, any remaining balance is paid from the surviving spouse’s separate property.


Administration of the decedent’s estate plays a major role. In a probate all reasonably ascertainable creditors must be notified.


Creditors have a four month “claims period” to file timely claims, subject to the one year statute of limitations. Untimely or unfiled creditor claims are denied.


Moreover, the surviving spouse may elect to include her half of the community property as part of the probate in order to deny untimely or unfiled creditor claims from enforcement against the surviving spouse’s own one-half share of the community property assets.


If no probate was commenced and the decedent’s estate was held in a living trust, then the trustee may proceed with an optional claims procedure, similar to probate, in order to time bar other creditors who file late or do not file at all.


Unlike with probate, the surviving spouse may not elect to include her one-half share in trust community property assets as part of the creditor claims process. Only if all community property passes through probate is protection definitely afforded against untimely claims.


Who the creditor is also is important. Is the creditor a secured creditor who may go against some collateral, or guarantee, and pursue any deficiency judgment as an unsecured creditor? Is the creditor the California’s Estate Recovery Unit requesting repayment for SSI/Medi-Cal welfare benefits received by the decedent while alive? If so their claim will not become enforceable until after the surviving spouse dies.


Is the creditor is the Internal Revenue Service? If so, did the couple filed a joint return or filed separately? If they filed jointly for the year in question, then the surviving spouse is fully liable for the tax debt.


How to proceed in any individual matter requires examination of the particular facts related to the deceased spouse’s estate. A qualified attorney should be consulted for guidance.

 

Dennis A. Fordham, attorney (LL.M. tax studies), is a State Bar Certified Specialist in Estate Planning, Probate and Trust Law. His office is at 55 1st St., Lakeport, California. Dennis can be reached by e-mail at This email address is being protected from spambots. You need JavaScript enabled to view it. or by phone at 707-263-3235.


Follow Lake County News on Twitter at http://twitter.com/LakeCoNews and on Facebook at http://www.facebook.com/pages/Lake-County-News/143156775604?ref=mf .

 

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