Elders in California enjoy enhanced state exemptions that protect them from collection on unpaid debts.
Those protections often make it unnecessary for a debt-laden senior to file bankruptcy.
But no one talks about one consequence of relying on exemption law to fend off creditors.
California exemption laws that fully protect the assets of seniors provide no protection to the heirs.
The elder who elects to rely on state law exemptions during his lifetime may be leaving his estate , in effect, to his creditors.
Probate pays creditors
Probate is a proceeding to assure that the property of the decedent (the person who has passed away) goes to the correct parties after payment of the decedent’s debts.
In probate, creditors have a short period to file their claims. Allowed claims are paid in full before the heirs receive anything.
Once the allowed claims are paid, the heirs have no liability to the decedent’s creditors.
Probate law provides for a homestead exemption to provide a place for the surviving spouse and any minor children to live. Cal. Probate C. 6520 and following. The protection of the probate homestead lasts only as long as the probate administration and the property remains liable for the debts of the debtor. Probate C. 6526.
The probate court can likewise set aside other assets for payment of a family allowance for a surviving spouse, minor children and adult children who are incapacitated and dependent on the decedent.
The family allowance also ends with the final order in the probate.
Revocable trusts expose assets to creditors
The revocable trust, or living trust, is a popular way around the expense and delay of probate. But it comes with a little discussed exposure to creditors.
When the trustor (the person who creates the trust) dies, the assets of the trust are distributed by the successor trustee as the document provides. No probate is required for trust assets.
But, unless the successor trustee opens a court proceeding to administer the trust estate and gives notice to creditors, any gift to heirs from the trust comes with personal liability for the debts of the decedent. Probate C. 19400. That liability is capped by the amount of the gift.
Creditors have one year from the death of the trustor to file suit against the heirs to collect the debt. Cal. C. Civ. Pro. 366.2.
Bankruptcy eliminates the debts
If the senior elects during his lifetime to file a bankruptcy case, he can use the generous bankruptcy exemptions available to Californians to protect the assets he has, including up to $175,000 in equity in his residence.
Most unsecured debts are wiped out for all time. Any accumulations after bankruptcy are free from the claims of the pre bankruptcy creditors.
And, at the senior’s passing, discharged creditors have no claim against the estate or the trust heirs. Whatever assets the senior has flow to those of his choosing, rather than the creditors eliminated in bankruptcy.
That point, alone, might tip the scales in favor of a bankruptcy filing even for the collection-proof senior.