Inventory and Appraisal
By: T. Scott Galloway | Posted: 06th October 2009
At the most basic level, the inventory is the list of the assets of the probate estate. It is a tool with two main purposes. It gives notice to the interested persons of the items that are part of the estate (and, if not listed, what is not part of the probate estate ). The inventory also provides the probate court with the information necessary to calculate the inventory fee.
Within 91 days of the appointment of the personal representative, the information necessary for the computation of the inventory fee must be submitted to the court. See MCL 700.3706 and MCR 5.307.
Note that not all inventories must be filed with the court. In unsupervised administration, it is permissible to submit the inventory for review by the court. The inventory fee will be determined and the inventory will be returned without filing. An inventory that has been submitted but not filed must be sent to "all presumptive distributees and to all other interested persons who request it." MCL 700.3706(2) The proof of service (PC 564) should be kept and, as appropriate, filed with the court.
The amount of the inventory fee is set forth in MCL 600.871. The inventory fee must be paid before the final account is filed or one year from the commencement of the estate, whichever occurs first. Especially with illiquid estates (like where you can't get the house sold), this timeline can pose a problem. Wayne County Probate Court is dealing with this problem by having the personal representative sign an Inventory Fee Acknowledgement and Extension to Pay form (WCPC 380). A number of probate courts throughout the state include inventory fee calculators on their websites. Simply enter the amount of the inventory and the fee is calculated. See http://www.kalcounty.com/courts/Probate/inventory.asp (Kalamazoo County Probate Court); http://www.barrycounty.org/courts-and-law-enforcement/family-division/probate-court/inventory-fee-calculator/ (Barry County Probate Court with the text of MCL 60.871).
Form PC 577 should be filled out and submitted to the court in order for the personal representative's obligation to be satisfied. If you represent the initial personal representative, the inventory includes the value of both real and personal property at the time of the decedent's death. Subsequent personal representatives will need to file an inventory as well. These inventories will be valued as of the date of the subsequent personal representative's qualification to serve.
Preparation of the inventory may require having appraisals done, contacting investment companies or banks, looking up blue book prices for cars, and/or having the personal representative go through the decedent's personal belongings and report anything of high value. The Instructions for Form PC 577 provide list of items that should be submitted to substantiate an asset's value.
It is important to make sure that all the inventory items are listed with enough detail. With bank accounts, the account number as well as the address of each financial institution must be listed. If the value of the property is determined by an appraisal, make sure the appraiser's name and address is included, as well as a legal description of the real property or a detailed description of any personal property.
The value of stocks for inventory purposes is the average high and low value on the day of death, multiplied by the number of shares. There are several web sites that can help you find this information. See http://bigcharts.marketwatch.com/historical/.
Real property is included on the inventory list as long as it is not held as joint owners or entireties property. Make sure that with all real property the commonly known name is listed and that the legal description and tax ID are included. Even though you should note any encumbrances on the property, you cannot reduce the value on the inventory according to Michigan Court of Appeals decision Estate of Wolfe-Haddad v. Oakland County, 725 NW2d 80 (2006) . The value of real property for the inventory is determined by either doubling the state equalized value (SEV) value or by an appraisal. The SEV should be from a recent property tax bill. Though an appraisal is more expensive, with the declining market it can be a lot more accurate.
Personal property generally has little value to the estate. It should be included on the inventory but the amount attributed to it should be nominal. Some practitioners do not include the tangible property on the inventory unless it has significant value. If there is truly something of value in the inventory, it should be appraised.
ACCOUNTING AND TAX CONSIDERATIONS
According to MCL 700.3703(4), the personal representative must give an annual account of all the receipts and disbursements until the estate is fully distributed. This account must be served on all the interested persons in both supervised and unsupervised estates and must be filed with the court in supervised estates.
In supervised estates, the format of the accounting must comply with the format requirements of MCR 5.310(C)(2)(c). Because you never know when you're going to need the account to be approved by the courts, even in an unsupervised estate, it is always good to follow the format rules regardless of the type of estate. Account of Fiduciary forms (PC 583 or 584) help you comply with these rules.
The top of the Account form identifies the probate court, the number of the account (1st Annual, Final, Interim), the case number and the case caption. These details should be completed with care. The account period runs from the date the Letters of Authority were issued and can be for no more than one year per account.
After filling in all the basic information about the estate and the personal representative, you must first enter the beginning balance. On a first accounting, this will be the inventory amount. If it is a second or subsequent accounting, the beginning balance will be listed as the assets remaining at the end of the first or immediately previous accounting.
After figuring out the beginning balance, it is necessary to account for any income in the accounting period in Schedule A. Both the source and the amount received have to be included. If the name of the source makes it unclear as to what the nature of the income was, it is usually good practice to put a general description. The income listed in Schedule A does not include any newly found assets. Such discovered assets must be included in an amended inventory.
Next, you must account for all of the expenses during the accounting period in Schedule B. Expenses include any administrative costs, any creditors that were paid, attorney's fees that were paid, expenses of the personal representative that were approved and paid, and any distributions to the beneficiaries. Be sure to include the name of the creditor or individual and the amount that was paid. This section does not include any losses from assets listed in the inventory that were sold off.
Transparency in how the funds were spent is key. Written support for the disbursements is the best way to get your account accepted by the court and the interested persons. The court will require a summary of legal, accounting and fiduciary fees. The bills for these services should include what services were performed, by whom, how much time was expended for each task and the billing rate for each task.
The next section, Schedule C, is where you account for any gains and losses in the sale of assets. For example, if a stock was liquidated during the accounting period the value at the time of death (from the inventory) and the value that it was liquidated for must be entered. A total gain or loss for that asset is then calculated. After all the assets are entered, the net gain or loss is calculated. If there is a net gain, it is entered in Schedule A. If it is a net loss, it is entered in Schedule B. If no assets are sold or need to be accounted for, it is acceptable to use the Short Form, PC 583, rather than the Long Form PC 584.
In Schedule D, all the assets that remain in the estate are accounted for. For example, if there is a house or car that has not been sold yet, it should be listed. Also any bank accounts and the value at the time of accounting must be listed. The description and the value (with the possible exception of bank accounts), should be the inventoried value, not the market value at the time of accounting. Attorney fees and fiduciary fees incurred during the accounting period, whether paid or not, must also be recorded on the form. A written description of the time spent and services performed must be attached. If an attorney is acting as the personal representative it is important for them to separate their time between fiduciary responsibilities and legal services.
It is important for the fiduciary to be aware, from the beginning of the administration, that if he or she wants to be paid for the work performed, the fiduciary must track his or her time in detail. Also, it is always good to explain to the personal representative that the more organized he or she is with the receipts and accounting, the less attorney fees will be incurred while filling out the accounting forms. It will save both time and money in the long run if the staff does not have to track down a missing expense or income source or spend time going through shopping bags full of disorganized receipts.
The estate must send a copy of the accounting to each beneficiary if he or she has not received that beneficiary's full share. One the share is paid in full, the personal representative is no longer to provide that beneficiary with future accounts. Regardless of whether the estate is supervised or unsupervised, proof of service should be filed with the court. It may be desirable to have the Probate Court approve the account each year.
Tax Issues
Early in the administration, the personal representative should obtain an Employer Identification Number (EIN) for the estate. The estate is a separate taxing entity and should therefore have its own EIN. The decedent's social security number should no longer be used for tax reporting. An EIN may be obtained by mail, phone (800.829.4933) or on the web (irs.gov). If obtained by phone or web, the EIN will be issued immediately. A Notice Concerning Fiduciary Relationship (IRS Form 56) should also be filed with the IRS.
The personal representative must remember that state and federal income taxes still must be filed for the final year of the decedent's life. This can be done on a standard 1040. Remember, this is only income that was earned by the decedent before his or her death. A surviving spouse may elect to file this final return as a joint return. If the personal representative files this final return, the decedent's death should be made plain on the top of the return. Be mindful of filing deadlines and if necessary obtain an extension of time to file.
If the estate has gross income of more than $600 in a year or any taxable income the estate must file a fiduciary income tax return. This return is filed on IRS Form 1041 for the federal return MI-1041 for the state return.
It is important to do an early analysis of the estate to determine the estate tax liability. If the gross estate is in excess of the then applicable estate tax exemption amount ($2 million for 2008, $3.5 million for 2009, no maximum for 2010 and $1million for 2011), an estate tax return will need to be prepared. The forms are IRS Form 706 and MI-706. This return is due nine month's after decedent's death. An extension of time to file is available.
Especially with larger estates, it might be in your best interest and your client's best interest to hire an outside accountant or at least consult with an accountant to make sure that all the forms are filed correctly and timely. Do not be afraid to admit when you are over your head.
PROBATE CLOSING FORMS
Before closing the estate it is important to make sure that all the administrative duties have been completed. All of the creditors and taxes must be paid off or otherwise addressed. When this is done, do a final accounting using PC 583 or 584, serve it on the beneficiaries of the estate who have not received his or her complete share, and file a Proof of Service with the court. The process for completing the final account is as described previously. The "Final" box at the top of the form should be checked. Unlike prior annual accounts, assuming assets in the estate, the ending balance will be $0.00.
Distribution
The personal representative has authority to make distributions from the estate as partial distributions during the course of the administration and at the conclusion of the administration. If proceeding in unsupervised administration, court approval of such distribution is not required.
If proceeding in supervised administration, court approval must be sought prior to any distribution. See MCL 700.3504 and 700.3505. The personal representative should petition the court for approval of the proposed distribution. Notice of Hearing (PC 562) and Proof of Service should be sent to all interested persons. The parties can execute waivers and consents (PC 561) to expedite the process and perhaps obviate the need for a hearing.
Be careful when making partial distributions. Once the funds flow out of the estate, it may be difficult or impossible to retrieve the funds from a beneficiary if additional costs or expenses are incurred by the estate. The personal representative does have authority to seek recovery of estate assets improperly distributed to an heir, devisee or creditor. See MCL 700.3911. It is the better practice to be cautious in making distributions.
When distributions are contemplated, the personal representative may give the recipients notice of the intended distribution. Providing written notice of the type and scope of the distribution puts the recipients on notice and if he or she objects to the distribution, such objection must be given in writing to the personal representative within 28 days. See MCL 700.3908. If there is disagreement about the distribution proposed, the parties can reach an agreement to alter shares. See MCL 700.3914
The preferred method for distribution is an "in-kind" distribution. See MCL 700.3906. That is, distributing the assets of the estate in the form in which the estate obtained them. This is true whether the assets are cash, stocks, bonds, vehicles, business interests or real estate. If the recipients of the estate do not want to receive certain assets owned by the decedent, they will be sold as part of the administration with the proceeds distributed. In the current economic conditions, inability to sell the real estate may delay the conclusion of administration. In those circumstances, the beneficiaries sometimes elect in kind distribution of the real estate so that the estate may be closed and the real estate sold outside of the estate.
When distributions are made, it is important that the personal representative receive signed acknowledgement of the receipt of the distribution. This acknowledgement is most easily obtained using the Receipt of Distributive Share form (PC 588). This form can be modified to accommodate different kinds of distributions. It does not need to be limited in use to distributions of tangible property.
Informal Closing
Once the estate has been fully administered, including payment of claims, taxes, expenses and distributions being made to the beneficiaries, a Sworn Closing Statement (PC 591) must be filed. This form indicates that the personal representative has fulfilled all of his or her responsibilities and that the estate is prepared for closing. Specifically that (1) notice to creditors was published and the claims periods have ended; (2) all claims, taxes, and distributions were paid or arrangements were made for them; (3) the closing statement was sent to all distributees and unpaid creditors; and (4) accounts were sent with the amounts paid for fiduciary, attorney, and other professional fees indicated. See MCL 700.3954. The personal representative's signature must be notarized.
The interested persons have 28 days to object to the closing of the estate. After 28 days, a Certificate of Completion (PC 592) may be obtained. The estate is then complete.
Formal Closing
A formal closing of the estate provides a judge-ordered finality to the estate administration in a way that is not obtained through an informal close of the estate. A court order completing administration can discharge the personal representative from potential liability as well as limit future will contests. If the parties to the estate are contentious, a formal closing is the way to go. A formal closing is available even if the estate was opened informally. If the estate administration is a supervised administration, it must close formally.
Formal closing is accomplished by filing Petition for Complete Estate Settlement. If a will has already been formally adjudicated then PC 593 is used. PC 594 is used if the decedent died intestate or if the will has not been adjudicated previously with the court. It is advisable to include a Schedule of Distributions and Payment of Claims (PC 596) and the final account with the Petition. Once the hearing is set, send these pleadings, a Notice of Hearing and Proof of Service to the interested persons (the devisees of a testate estate, heirs unless there was a previous adjudication of testacy, claimants, and any other persons whose interests are affected by the relief prayed for). An proposed Order for Complete Estate Settlement (PC 595) for the judge should also be submitted with these pleadings.
If the petition requests discharge of the personal representative (which it almost always should), be sure that the inventory, accountings, notice of appointment, notice regarding attorney fees, notice of spousal election and allowance, affidavit of publication to unknown creditors, a statement that all Michigan estate taxes have been paid or that no federal estate tax return was required to be filed for the decedent and any proofs of service are all filed with the court.
If you can obtain Waivers and Consents from all of the interested persons, you may be able to avoid the need for a hearing.
After the hearing, assuming all goes well, the court will enter the Order for Complete Estate Settlement. Parties have 28 days after entry of the court's order to file a motion to set aside the order. Once that time passes, the parties are barred from contesting the matter, the personal representative is discharged and the estate is concluded.
If the estate has not been completely distributed, the personal representative will need to present proof of the distributions and seek an Order of Discharge (PC 597). Each beneficiary should sign a Receipt of Distributive Share (PC 588) which could be filed with the court.
ANCILLARY ADMINISTRATION
A full probate procedure is not usually necessary for a non-resident who simply held property in Michigan. The appointed personal representative in decedent's domicile state, called the foreign personal representative, can usually take care of the matters as long as a local administration is not pending in Michigan. 63 days after the decedent's death, a person holding property belonging to the decedent can turn the property over to the foreign personal representative and be released of liability. The foreign personal representative must present proof of the domiciliary personal representative's appointment and a sworn statement made by or on behalf of the representative stating (1) the date of the nonresident decedent's death (2) that local administration, or an application or petition for local administration, is not pending in Michigan and (3) that the domiciliary foreign personal representative is entitled to payment or delivery of the property. See MCL 700.4201 and 700.4202.
Notice of Ancillary Administration Filing, PC 619, is used if the foreign personal representative needs to do more than collect money and the decedent's property. For example, if the foreign personal representative needs to sell a piece of real property. This form must be filed with the court and it gives the foreign personal representative the power of a local personal representative without actually opening an estate in Michigan. These powers are set forth in MCL 700.4203 and include the power to execute deeds and discharge mortgages. This does not result in local administration or local appointment of the personal representative. By filing the Notice of Ancillary Administration Filing with a Michigan probate court, the foreign personal representative does submit to the jurisdiction of the Michigan court for estate related matters.
If an application for local administration is entered, the local powers of the foreign personal representative are terminated and a local personal representative is appointed. The administration in the decedent's domicile then has no bearing on the Michigan estate administration.
If the estate that you are administering here in Michigan has property located in other states or countries, it will be necessary to seek the assistance of counsel licensed in the other jurisdiction. There are many attorneys in Michigan who are licensed in multiple jurisdictions. They may provide a nearby solution to probating property at a distance.
MISCELLANEOUS FORMS
In theory, uniformity of practice suggests that the probate practice should be identical from one part of the state to another. But as Yogi Berra said, "In theory there is no difference between theory and practice. In practice there is." This section is aimed at highlighting some differences of approach across some of the probate courts in our state.
Petition for Approval of Sale of Real Estate
A Petition for Approval of Sale of Real Estate (PC 646) only needs to be filed if court approval is required to dispose of real estate. For example, if the Letter of Authority gives the personal representative restricted powers, this pleading will most likely have to be filed, served on the interested persons, and a hearing will be held (unless waivers and consents are obtained from all interested persons). If the personal representative's powers are unrestricted this step is not necessary. When filing the pleading, remember to include a tax assessor's statement with the SEV and a copy of the Purchase Agreement. Wayne County Probate Court has a slightly different form to be used.
Notice of Continued Administration
If an estate is unable to be closed within a year of the appointment of the personal representative, a Notice of Continued Administration (PC 587) must be filed within 2 months of the estate's anniversary. It also must specify why it is necessary to continue the administration. For example, assets may still need to be disposed of and distributions made. This form must be served on all interested persons. Some courts accept these notices with little difficulty. Others are much more demanding in the rationale for keeping an administration ongoing.
Information Changes
It is very important for the courts to have current and accurate information about the personal representatives (and the attorneys for that matter). Wayne County and Oakland County both have specific forms that need to be filled out. In Wayne County, there is a Change of Address form. In Oakland County there is a Fiduciary Information Form (PEMH 1018) that must be filled out and can be found on the Oakland County Probate Court's website (http://www.oakgov.com/probate/form_application/).
Other Wayne County Probate Court Forms
An Affidavit Regarding Whereabouts of Certain Interested Persons (WCPC 23) can be filed with the court if a beneficiary or heir cannot be found. This is more often used in unrepresented estates, but can also be filed by attorneys. There is also a Testimony Interested Parties for a Wrongful Death case (PC 09). It is slightly different than a SCOA Testimony Interested Persons. It does not need to be filed. It can be useful to determine parties entitled to take under a wrongful death case.
Other Oakland County Probate Court Forms
A Petition and Order for Discovery Estate Not Exceeding $15,000 is available in Oakland County. This allows a person with a relationship to the decedent to obtain bank and property records, assuming the estate is less than $15,000. This form looks similar to a small estate affidavit but it is used to gain information about the decedent's bank accounts.
There is also a Request for Extension of Time for Compliance (PEMH 1063). This form can be filed with the court if a Notice of Deficiency has been issued against the fiduciary. If granted, it allows the fiduciary 28 more days to comply with the notice.
Other Kalamazoo County Probate Court Forms
Kalamazoo County has a separate Notice of Intent to Close that they will send to the personal representative if a continued administration is not filed (PC 589). After 63 the court will enter an order administratively closing the estate (PC 599).
Be aware that many pleadings that have to be filed with the court require a filing fee. The fee schedules for Wayne, Oakland, Macomb, and Kalamazoo County are included.
Finally, attached you will find a chart displaying degrees of kinship that can be useful in determining heirship.
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