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Who Gets Paid When The Decedent's Estate Is Insolvent?

Very often, decedent's estates may not have sufficient assets to satisfy all of the claims against them, let alone have anything left to provide a meaningful inheritance to the heirs. A probate proceeding could appear more like a bankruptcy with creditors clamoring to get any piece of the pie that they can. So what does the personal representative do in this situation?

Fortunately, Michigan law provides guidance in determining the order that claims should be paid. MCL 700.3805 provides "[i]f the applicable estate property is insufficient to pay all claims and allowances in full, the personal representative shall make payment in the following order of priority:"

  • (a) Costs and Expenses of Administration.
  1. Administrative expenses of an estate include attorney fees, accountant fees, appraiser fees, court fees (e.g. filing fee and inventory fee) and fiduciary fees.
  2. Since attorney fees, fiduciary fees and the expense of auditors, investment advisors and other assistants is authorized by statute, it is not necessary to preserve claims against the estate for these fees and costs.
  3. Attorney fees and fiduciary fees are subject to the probate court's determinations that such costs were reasonable. As such, the amount requested can be adjusted accordingly and an agent or employee of the estate that received excessive compensation can be ordered to reimburse the estate with possible interest and penalties.
  • (b) Reasonable Funeral and Burial Expenses.
  • (c) Homestead Allowance (MCL 700.2402)
  1. The surviving spouse is entitled to a homestead allowance of $15,000.00 (adjusted to $23,000.00 in 2018). If there is no surviving spouse, the homestead allowance of $15,000.00 (adjusted to $23,000.00 in 2018) is divided in equal shares among the decedent's minor children and dependent children.
  2. The homestead allowance is in addition to any shar passed to the surviving spouse or child by the last will and testament, intestate succession or elective share.
  • (d) Family Allowance (MCL 700.2403)
  1. The surviving spouse, minor children that the decedent was obligated to support, or children of the decedent that were actually being supported are entitled to a reasonable family allowance for their maintenance during the administration of the estate. The allowance may be paid in a lump sum or periodic payments. The statute does not specify a maximum dollar amount, but the personal representative may grant up to $18,000.00 (adjusted to $27,000.00 in 2018) paid as a lump sum or periodic payments with additional amounts that may be authorized by the probate court. MCL 700.2405.
  2. The family allowance shall not continue for more than one year if the estate has insufficient assets to discharge other allowed claims.
  • (e) Exempt Property (MCL 700.2404)
  1. The surviving spouse (or, if no spouse, the children of the decedent in equal shares) are "entitled to household furniture, automobiles, furnishings, appliances, and personal effects from the estate up to a value not to exceed $10,000.00 (adjusted to $15,000.00 in 2018) more than the amount of any security interests to which the property is subject."
  2. If there is insufficient exempt property, the spouse or children are entitled to take any other assets of the estate necessary to make up the $10,000.00 value (adjusted to $15,000.00 in 2018).
  • (f) Debts and Taxes with Priority Under Federal Law
  1. Includes federal income taxes, gift taxes and estate taxes.
  2. Includes medical assistance payments subject to adjustment or recovery from an estate under 42 U.S.C. 1396p (e.g. the Michigan Estate Recovery Program for Medicaid payments made to the decedent).
  • (g) Reasonable and Necessary Medical and Hospital Expenses of the Decedent's Last Illness

  • (h) Debts and Taxes with Priority Under Other Laws of this State.

  • (i) All Other Claims.

An estate cannot be completed unless all creditor claims are paid, settled or otherwise dealt with. The personal representative must satisfy notice requirements to all creditors according to statute. First, a general notice to creditors must be published in the appropriate newspaper which creates a 4-month deadline for unknown creditors to submit claims. Second, the personal representative must send direct notice to those known creditors within the 4-month claim period (or, if the period is about to end, within 28 days) where the personal representative has actual notice of the creditor's existence or would reasonably ascertain the existence after reviewing the last two years of the decedent's papers and mail. All properly notified creditors must present a claim within the 4-month claim period or within 1 month of receiving direct notice, whichever is later.  If a claim is not properly presented, then THE CLAIM IS BARRED FOREVER. If the personal representative fails to satisfy these notice requirements, then the creditor can present a claim anytime within three years of the decedent's death.

MCL 700.3809 addresses secured claims (e.g. home secured by a mortgage, car secured by a lien) in that the lienholder has a priority position with respect to the secured property. However, the lienholder is in the same position as other creditors with respect to any claim against the estate for the amount of any deficiency existing after exhausting the security. In re Lundy Estate, 291 Mich App 347; 804 NW2d 773 (2011). Secured creditors do not have to present claims in the same manner as unsecured claims with respect to the particular asset.

There is no preference in the payment of one claim over another claim if they are in the same category, and a claim due and payable does not have preference over a claim not due. MCL 700.3805(2).

Additionally, the personal representative has the following additional duties under MCL 700.3805(3) for insolvent estates:

  • If there are insufficient assets to pay all claims in full or to satisfy homestead allowance, family allowance, and exempt property, the personal representative shall certify the amount and nature of the deficiency to the trustee of the decedent's grantor trust, if any, for payment by that trustee.
  • If the personal representative is aware of other non-probate transfers that may be liable for claims and allowances, then, unless the will provides otherwise, the personal representative shall proceed to collect the deficiency in a manner reasonable under the circumstances so that each non-probate transfer, including those made from the decedent's grantor trust, bears a proportionate share or equitable share of the total burden.

Whether you are a personal representative or a creditor, it is important to understand the priority of claims, the notice requirements and the statutes of limitations for presenting claims. Creditors who miss these deadlines stand to lose a lot of money and personal representatives who ignore these rules risk individual liability for negligent acts. The advice of an experienced probate attorney is an invaluable guide to this legal quagmire. If you have questions about resolving claims or any other aspect of probate proceedings, do not hesitate to contact the lawyers at Kershaw, Vititoe & Jedinak PLC.

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