(a)
The trustee, the personal representative, if any, of a deceased settlor’s probate estate, and the surviving spouse may provide for allocation of debts by agreement so long as the agreement substantially protects the rights of other interested persons. The trustee, the personal representative, or the spouse may request and obtain court approval of the allocation provided in the agreement.
(b)
In the absence of an agreement, each debt subject to allocation shall first be characterized by the court as separate or community, in accordance with the laws of the state applicable to marital dissolution proceedings. Following that characterization, the debt or debts shall be allocated as follows:
(1)
Separate debts of either spouse shall be allocated to that spouse’s separate property assets, and community debts shall be allocated to the spouses’ community property assets.
(2)
If a separate property asset of either spouse is subject to a secured debt that is characterized as that spouse’s separate debt, and the net equity in that asset available to satisfy that secured debt is less than that secured debt, the unsatisfied portion of that secured debt shall be treated as an unsecured separate debt of that spouse and allocated to the net value of that spouse’s other separate property assets.
(3)
If the net value of either spouse’s separate property assets is less than that spouse’s unsecured separate debt or debts, the unsatisfied portion of the debt or debts shall be allocated to the net value of that spouse’s one-half share of the community property assets. If the net value of that spouse’s one-half share of the community property assets is less than that spouse’s unsatisfied unsecured separate debt or debts, the remaining unsatisfied portion of the debt or debts shall be allocated to the net value of the other spouse’s one-half share of the community property assets.
(4)
If a community property asset is subject to a secured debt that is characterized as a community debt, and the net equity in that asset available to satisfy that secured debt is less than that secured debt, the unsatisfied portion of that secured debt shall be treated as an unsecured community debt and allocated to the net value of the other community property assets.
(5)
If the net value of the community property assets is less than the unsecured community debt or debts, the unsatisfied portion of the debt or debts shall be allocated equally between the separate property assets of the deceased settlor and the surviving spouse. If the net value of either spouse’s separate property assets is less than that spouse’s share of the unsatisfied portion of the unsecured community debt or debts, the remaining unsatisfied portion of the debt or debts shall be allocated to the net value of the other spouse’s separate property assets.
(c)
For purposes of this section:
(1)
The net value of either spouse’s separate property asset shall refer to its fair market value as of the date of the deceased settlor’s death, minus the date-of-death balance of any liens and encumbrances on that asset that have been characterized as that spouse’s separate debts.
(2)
The net value of a community property asset shall refer to its fair market value as of the date of the deceased settlor’s death, minus the date-of-death balance of any liens and encumbrances on that asset that have been characterized as community debts.
(3)
In the case of a nonrecourse debt, the amount of that debt shall be limited to the net equity in the collateral, based on the fair market value of the collateral as of the date of the decedent’s death, that is available to satisfy that debt. For the purposes of this paragraph, “nonrecourse debt” means a debt for which the debtor’s obligation to repay is limited to the collateral securing the debt, and for which a deficiency judgment against the debtor is not permitted by law.
(d)
Notwithstanding the foregoing provisions of this section, the court may order a different allocation of debts between the deceased settlor’s probate estate, trust, and the surviving spouse if the court finds a different allocation to be equitable under the circumstances.
(e)
Nothing contained in this section is intended to impair or affect the rights of third parties. If a trustee, a personal representative, if any, of a deceased settlor’s probate estate, or the surviving spouse incurs any damages or expense, including attorney’s fees, on account of the nonpayment of a debt that was allocated to the other party pursuant to subdivision (b), or as the result of a debt being misallocated due to fraud or intentional misrepresentation by the other party, the party incurring damages shall be entitled to recover from the other party for damages or expense deemed reasonable by the court that made the allocation.
