When people hear the word probate, they usually think primarily of how the estate of a decedent is distributed to the heirs. But another, and equally important side to probate is in managing the claims against the estate.
This is the responsibility of the personal representative, who in this sense serves as a kind of gatekeeper of the claims. This is also a side to the probate process where the personal representative is potentially exposed to personal risk.
If the personal representative mishandles even a single creditor claim – by failing to notify a creditor, overlooking the payment of a bill, or paying out claims in the wrong order, a court can find the personal representative liable for surcharge.
Reasonable Diligence in Identifying and Investigating Creditors
Like a detective, the personal representative is expected to identify all reasonably ascertainable creditors. This is mandated under Probate Code §9050.
That you didn’t know about a creditor will not be considered a good defense. If the claim, or the creditor, was reasonably identifiable by diligent investigation, the responsibility for this lapse falls squarely upon the shoulders of the personal representative.
Worst case scenario – any distributions or payments made by the personal representative within the context of that lapse might be invalidated.
This means that the personal representative is expected to be diligent in his investigation into all claimants of the estate. Rather than passively waiting for the bills to arrive, or doing a cursory review of available documents, he is expected to consolidate all possible records and conduct a careful review of oustanding debts.
That is, the personal representative should request and audit all available physical and digital records; for instance, bank records, hospital records, government and court records, land titles, chattel registrations, insurance policies and claims. He should also systematically check the decedent’s mails, emails, SMS messages, voice mails, and other communications.
If a claim could have been reasonably ascertained through these methods, the personal representative cannot later on simply claim that he did not know about the debts of the estate that he failed to account for. Claiming that he did not know about a debt is not a valid excuse.
Critical Notice Requirements
Some notice requirements carry a heavier risk than others.
If the decedent received Medi-Cal benefits, the personal representative is obligated to notify the Director of Health Care Services within 90 days of death. If you miss this window, you can expose both the estate and yourself to liability.
Another state agency you may want to examine for notice obligations is the California Victim Compensation Board (CalVCB). If the estate has heirs or beneficiaries who may be incarcerated, and they owe court-ordered restitution, you are legally required to notify the board that the person incarcerated might be entitled to an inheritance. Simply put, the state may have a right to collect the unpaid restitution from the inheritance.
For both Medi-Cal and CalVB, the duty to notify is incumbent upon the personal representative. Failure to do so can open you up to surcharge. For the estate, it could mean contested payments and distributions, reopened claims, and a delayed closing of the probate process.
Allowing or Rejecting Claims
Once a creditor files a formal claim, the personal representative must decide whether to allow or reject it.
Allowing a claim
If a claim is valid and supported by evidence, the personal representative must allow it. This does not mean automatic payment on the claim, however. For the claims that are deemed valid, any payments must still meet the statutory rule on priority of payments.
Waiving defects
A creditor’s claim is generally filed in a standard form. Sometimes there are defects to the claim filed. A personal representative may, however, despite those defects, opt to waive the defects and allow the claim. For the personal representative, this is a smart way to handle a claim that is valid in substance. Waiving minor technical defects would, in the long run, avoid costly litigation in the long run.
90-Days to file suit
Should the personal representative opt to reject a claim – the creditor has 90 days from notice of the rejection to challenge the rejection and establish their claim. This is a strict window of time. If they fail to file within the 90 days, their claim is generally extinguished.
No action in 30 days
If a creditor files a claim but the personal representative fails to act on it within 30 days, the creditor may then treat it as though it was formally rejected. He can then challenge the rejection in court.
Payment Priority
Probate Code §11420 provides a strict hierarchy of claims and priority of payments:
- Administrative expenses
- Secured debts
- Funeral expenses
- Costs from the last illness
- Family allowance
- Wage claims
- General unsecured debts
But what happens if the estate assets and funds are not enough to pay off all the claims?
If there are not enough funds to fully pay off the claims against the estate, priority of payments must still be followed. For instance, all administrative expenses must be fully paid before secured debts are paid. If there is not enough left to pay all secured debts, the general rule is that all the allowed creditors in each class must be paid pro rata.
It would be considered a breach of fiduciary duty if the personal representative, for instance, pays off one secured debt in full and leaves the rest in the same category as partially unpaid or completely unpaid. The court may treat this as showing undue favoritism for a preferred creditor, treat it as a violation of fiduciary duty, and impose a surcharge on the personal representative.
The One-Year Ban
While there are a few exceptions, legally, claims against the estate are barred one year from the date of death. This is true regardless of when probate was opened, when letters of authority were issued, or when notice was given to creditors.
This time limit is protection, in a way, for the personal representative. It provides a fixed time within which he can entertain claims against the estate, and a legal basis for denying or rejecting late claims. Practically, it provides peace of mind for both the personal representative and the heirs of the estate.
This, however, assumes that the personal representative conducted his responsibilities with the required degree of diligence and care – including timely notifications sent to all reasonably ascertainable creditors. Otherwise, some exceptions may be made for claims filed even beyond the one-year period.