By
Roberta M. Gubbins
Legal News
The first question that needs to be asked, said Joe Viviano, opening his discussion of insolvent estates at the ICBA Probate and Trust Section Meeting, held on September 17th at the State Bar of Michigan in Lansing, is:
What is an insolvent estate?
EPIC (Estate and Protected Individuals Act), explained Viviano, does not define the term “insolvent.” So I looked at other statutes that define insolvency.” The three main sources were Bankruptcy Law, the Uniform Fraudulent Transfers Act (UFTA) and the Uniform Commercial Code (UCC).
Under the UCC, which includes by Bankruptcy law by reference, and the UFTA, there are two definitions of insolvency. The first is the cash flow test—a person, which includes a trust or an estate, meets the cash flow test if they are currently unable to meet their debts as they become due. We really can’t use that to define an estate,” which may have sufficient assets but present liquidity problems prevent payment in full.
The second, the balance sheet test, describes a person as being insolvent if the sum of the debts is greater than all of the person’s property. This is the type of insolvency usually associated with an insolvent estate. If the sum of all the allowed claims against the estate is greater than the value of the estate’s property, the estate is insolvent. However, this test “is incomplete” in that it only refers to claims or debts and doesn’t allow for statutory allowances.
Thus “for the purposes of today’s discussion, what I refer to as insolvent estate is an estate where the sum of the allowed claims and statutory allowances exceed the value of the total assets of the estate.”
Viviano distinguished between an insolvent and a depleted estate, explaining that a depleted estate is one that is insufficient to pay all specific and general claims and allowances in full.
Priority for payment of claims, distributions and devises from an estate:
According to EPIC (Subsection 3805(1), claims and statutory allowances of a decedent’s estate are paid before beneficiaries. The claims are paid in a specific order with the costs and expenses of administration at the top of the list followed by seven others. The list excludes secured claims, which are superior to all other claims and allowances to the extent of the loan.
Any assets remaining in the estate, if any, are then distributed as follows:
• Property not disposed of by the will
• Residuary devises
• General devises
• Specific devises
In situations where the estate is insolvent, the property of the trust is liable for the deficiency in the decedent’s estate.
Administering Claims
“There is a requirement to publish notice of the four month period for presenting claims,” said Viviano. “A personal representative doesn’t have to publish if 1) the decedent has been dead for more than 3 years, 2) the estate has no assets or 3) the estate qualifies as a “small estate.”
Known creditors must be provided with actual notice. They must present their claims within four months after notice was published or within one month after the actual notice was given. If notice is not published or actual notice is not given, creditors have three years to present claims.
“A claim has to be in writing,” said Viviano. “It must provide the claimants name and address and the basis of the claim.”
There are four ways to present a claim:
1. Deliver the claim to the personal representative (PR) or trustee,
2. Mailing the claim to the PR or trustee,
3. Beginning a proceeding in the probate court seeking payment, or
4. For claims against an estate, by filing a claim with the court.
Viviano advised that in probate estates, the claim be filed with the court as well as mailed to the PR.
“I wouldn’t rely on just mail. And in a claim against a trust, I would send it by registered mail return receipt requested.”
A PR or a trustee, he noted, may allow or disallow a claim that is timely filed. Claims can be disallowed if the claim is barred by the statute of limitations, the information provided by the claim is incomplete, the whereabouts of the claimant are unknown, the balance of the claim is zero after considering counterclaims or the claim is invalid or unenforceable. The claimant has 63 days to file an objection to the disallowance.
Strategies for litigation involving insolvent estates and depleted estates
Viviano’s first strategy is to wait out the creditors—“don’t open a probate estate.” The waiting period would be three years. Second, open a probate estate to collect the nonprobate transfers other than property in the decedent’s revocable trust.
Third, recover fraudulent transfers. A creditor may compel a PR to recover fraudulent transfers but must show that at the time of the transfer the decedent was insolvent. In other words, the fraud must have been committed during the lifetime of the decedent.
Other methods discussed by Viviano included:
• The PR who is also a beneficiary of an insolvent estate should consider electing to receive compensation.
• The remaining spouse should carefully evaluate the spousal elections to determine the value of each.
• The surviving spouse or children can petition to increase the family allowance
Joe Viviano, Foster Swift, started with the law firm in 2011 as a law clerk. He joined the firm as an associate after graduation from Michigan State University College of Law. During law school, Joe served as the Executive Editor of the Journal of Business and Securities Law, was a member of the Moot Court Board and earned the Jurisprudence Award in Evidence.
Admitted to practice law in Michigan, Joe is an active member of both the State Bar of Michigan and the Ingham County Bar Association.
The next Probate and trust meeting is Tuesday, October 15, 2013 at noon at the State Bar of Michigan, 306 Townsend St., Lansing Rooms 1 and 2. Speakers: Pat Ouellette, Bernick Radner & Ouellette Catherine Jacobs, Loomis Ewert Topic: Trust Administration. To RSVP for the Probate and Trust Section Meetings email Marlaine Teahan at mteahan@fraserlawfirm.com or Rosemary Buhl at rhbuhl@lawrhb.com Probate and Trust
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