When someone dies, the successor trustee may discover documents showing that the deceased person loaned money to a family member, friend, or business. A signed promissory note can represent a valuable asset that must be investigated as part of the administration. However, determining what the borrower actually owes is not always straightforward.

Determining Whether the Loan Belongs to the Trust

The first question is ownership. A promissory note may have been assigned to a revocable living trust, retained by the deceased person individually, or transferred through another arrangement. The trustee should examine the original note, trust documents, assignments, and related records before treating the loan as trust property. If the note is part of the probate estate instead, the personal representative may have responsibility for administering the claim.

Reviewing the Borrower's Obligations

A written loan agreement may identify the principal amount, interest rate, payment schedule, maturity date, and remedies available following default. The trustee should compare those provisions with bank records and the history of payments received. An informal understanding between family members does not necessarily establish that a debt was forgiven.

The passage of time can complicate collection. Depending on the facts, contractual limitation periods, modifications, acknowledgments, or other legal defenses may affect enforcement. The trustee should investigate these questions before making a demand or concluding that the debt has no value.

When the Borrower Is Also a Beneficiary

A particularly sensitive situation arises when a beneficiary owes money to the trust. Other beneficiaries may expect repayment before distributions are made, while the borrower may contend that the deceased intended the loan to be treated as an advance against inheritance.

The trustee should determine whether the trust contains specific provisions addressing beneficiary indebtedness or offsets. Without clear authority, simply reducing a beneficiary's inheritance by the alleged loan balance can create a dispute.

Deciding Whether to Pursue Collection

Trustees generally have obligations to protect trust property and evaluate enforceable claims. Collection costs, available security, the borrower's financial circumstances, and the likelihood of recovery may all affect an appropriate decision.

A negotiated compromise may be reasonable in some circumstances, but it should be supported by adequate information and appropriate authority. The trustee should preserve records showing how the decision was reached.

Key takeaways

• Determine whether the promissory note belongs to the trust or probate estate.

• Verify the amount owed and investigate potential defenses before demanding repayment.

• Document collection decisions, particularly when the borrower is a beneficiary.

An unpaid promissory note should not be ignored merely because the loan arose within a family. A careful review helps protect beneficiaries and reduces the risk of treating a disputed obligation as settled.

This article provides general information, not legal advice. For questions about a California trust promissory note in Ventura County, call Westlake Law Group at (818) 444-2022. 30699 Russell Ranch Road, North Building, Suite 210, Westlake Village, California. Virtual consultations are available throughout Southern California.

Educational links:

• https://leginfo.legislature.ca.gov/faces/codes.xhtml

• https://selfhelp.courts.ca.gov/probate