LIVING TRUSTS AND DEBTS:
WHICH METHOD WILL AVOID MOTHER’S DEBTS
An explanation of joint tenancy, probate,
and living trusts as debt avoidance methods
Deadline for Creditors Claims
Priority of Payment
Sale of Assets
Joint Tenancy and Debts
Living Trusts and Debts
Dear Mr. Miller: A few years back I applied for a credit advance of $14,000 and, to my surprise, I received the money. The largest share of this went to pay off a large hospital bill. Fortunately, I now have Medi-Cal. I keep up the payments but my concern is; as I am 75 years old, there will be quite a large amount owing at my death. The only property I have is my home which I own in joint tenancy with my daughter. I have no bank accounts or anything else! Will my children be responsible for my debt? They are unaware of this situation. What is the best way for me to make sure my home passes to my daughter and not to the creditor–Living Trust, Joint Tenancy, or Probate? —Mother With a Secret
Dear Secret: I’m as surprised as you are that you received this money. I’m sure you’ll continue to pay for as long as you’re alive, but as you have implied, the debt may outlast you. Your children have no responsibility to pay your debts unless they have signed some sort of guarantee. So if you die before this loan is paid back, the surprise may well be on the lender.
Deadline for Creditors’ Claims: Ordinarily, outstanding debts of someone who has died are handled through the Probate system. Creditors are notified that a Probate case has been started and are invited to file creditor’s claims. They generally have four months from the date the court appoints the Executor (the one who will handle the details of winding up your estate and your affairs) to file their claim.
Priority of Payment: Once the creditor’s claim period has ended, all the claims are reviewed and compared to the value of the property on hand. Sometimes the amount of the claims exceeds the value of the assets. For example, an estate might have nothing other than a $100,000 bank account but have $200,000 in claims. When this occurs, a priority system exists for the orderly payment of claims. The Executor’s and Attorney’s fees for handling the estate generally are paid first. (If they weren’t, no one would be willing to be an Executor or Attorney for a potentially insolvent estate.) Taxes are paid next. General debts, such as credit advances or utility bills would usually be paid last.
Sale of Assets: All property is sold to raise cash and claims are paid in their priority order until no cash is left. Those creditors that hold claims for which no money exists to make payment are simply out of luck.
Joint Tenancy and Debts: In your case, there are no assets or property that will go through the Probate system. The house is owned in joint tenancy and will pass to your daughter automatically when you die outside of the Probate system. Additionally, as a result of the Joint Tenancy ownership, the house will be free of your debt.
Living Trusts and Debts: Our readers should note that a Living Trust would not be as beneficial as Joint Tenancy. Assets in a Living Trust are liable to the decedent’s creditors. In fact, a Living Trust would provide the surviving family less protection from the mom’s creditors than even the ordinary Probate system. With a Living Trust, the assets in the Trust are liable to creditors for up to a year after the death of the individual while with a Probate the creditors would only have four months to file claims. So joint tenancy is the best of the three approaches in this situation.
Please keep in mind that no two sets of circumstances are identical and that the answer to any legal problem may change drastically based on even a slight change in the circumstances.