Probate & Trust Litigation

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Contradictions in NH Law: Claims of Deceased Settlor’s Creditors (Links to New Sample Notices)

Ralph HolmesIn preparing our NH Deadlines Page, I was struck by the significant inconsistency between our probate statutes and Trust Code relative to the limitations periods for claims against a decedent and offer the following comments in anticipation that this conflict will be of concern to counsel and lead to litigation.

Probate Scheme For Creditor Claims

Claims of a decedent’s creditor are made against the administrator of the decedent’s estate, that is, an estate must be opened and an administrator appointed for a claim to be adjudicated.  If no estate is opened, a creditor may petition to open the estate.  The administrator is the fiduciary who has the authority to value, defend, and settle the claims.  The deadlines for assertion of claims accordingly run from the date of the administrator’s appointment: a creditor must serve on the administrator a demand with the amount claimed within six months of the appointment (the “Probate Demand Period”) and  must file suit within the following six months (the “Probate SOL”).  If either deadline is missed, the claim is barred, unless the claimant is granted an extension upon the required showing of extraordinary circumstances.

Inadequacy of the Probate Scheme for Revocable Trusts

This scheme for resolution of creditor claims worked well when assets passed from one generation to the next via wills.  For the past several decades, however, “probate avoidance” through trusts has been the goal, meaning that probate estates are often never opened.  Because assets of a revocable trust may be reached by the settlor’s creditors “to the extent that the probate estate is inadequate to satisfy those claims,” the non-opening of a probate estate on death means that the deadlines for assertion of creditor claims do not run and revocable trust assets have continuing exposure to the claims of the settlor’s creditors, which, if brought, can upend trust administration.

The Trust Code Solution

Per 2017 amendments, the Trust Code grants trustees (not limited to trustees of revocable trusts) upon the death of a settlor the power to impose a one-year statute of limitations/repose (the “Trust Code SOL”) upon known and unknown creditors of the settlor by providing notice of: the settlor’s date of death, the settlor’s name and place of domicile, the name and address of the trustee, and the limitations/repose period (a “Trust Notice”). For known creditors, the trustee must “send” the Trust Notice and it must advise that any claim against the settlor will be barred unless a proceeding to enforce the claim is commenced within one year of the sending of the notice.  For unknown claims, the trustee must publish the Trust Notice once in a newspaper of general circulation of the settlor’s domicile and it must state that any claim against the settlor will be barred unless a proceeding to enforce the claim is commenced within one year of the date of the notice.  (Here is link to examplar Trust Notices for a known creditor and unknown creditors.)  Unless a claimant commences “a proceeding to enforce the claim” within the year as noticed, the “claim against the settlor shall be barred.”

My Comments

The inconsistency and tension between the above schemes are significant.  Both bar creditor claims against a decedent but have wholly different triggering dates with the Trust Code limitations period commencing upon a Trust Notice and the Probate Demand Period and Probate SOL commencing upon administrator appointment.  Neither scheme refers to the other and there is no guidance as to their relative priority when both are in play at the same time, which is certain to happen frequently.  Indeed, a creditor upon receiving a Trust Notice in order to pursue a claim against a deceased settlor generally will open probate.  The administrator will be the person who can answer and defend claim, authorize discovery of financial, medical, and legal records of the settlor, assert counterclaims and third party actions, and grant a settlement release.

As a practical matter, this incompatibility is most likely to arise when an estate is not opened for a deceased settlor and the trustee of her revocable trust issues a Trust Notice in order to protect trust assets from being reached by the settlor’s creditor.  If a Trust Notice is sent and a creditor opens probate, both schemes will be in play.  A trustee presumably will not issue a Trust Notice if the settlor’s estate is already opened because the trust should have the benefit of the already running probate limitations periods.

Although this may not have been the legislature’s intent, the schemes can be harmonized if a creditor’s opening of a settlor’s probate estate within a year of a Trust Notice is deemed to be “a proceeding to enforce the claim” satisfying the Trust Code SOL. The creditor would still have to satisfy the Probate Demand Period and Probate SOL.  All deadlines would be effective.

Until these issues are clarified by the courts or legislature, a creditor receiving a Trust Notice should before the Trust Code SOL expires file an action against the trustee while at the same time make sure that a probate estate for the settlor has been or is being opened.