Almost everything written about trust administration assumes there is enough money in the trust. When there is not, the trustee is in a different job with a different rulebook, and the order in which he writes checks stops being a judgment call and becomes a statute.

Two different situations get described the same way, and Michigan answers them differently. One is a trust too small to be worth administering. The other is a trust that owes more than it holds.

The first has a clean exit. The second has a fixed order of payment and a specific way for a trustee to end up paying out of his own pocket.

A Trust Too Small to Administer Can Be Closed Without a Judge

If the total value of the trust property is under the statutory threshold and the trustee concludes that the value is not enough to justify the cost of administering it, the trustee may terminate the trust after giving 63 days of notice to the qualified trust beneficiaries. MCL 700.7414(1). No petition, no hearing, no order.

The number in the statute is $50,000, and it is not the number that applies. Treasury publishes a cost-of-living factor every year, and the adjusted figure is rounded to the nearest $1,000. MCL 700.1210(3). For 2026 the threshold is $100,000.

The number in the statute is $50,000. The number that governs in 2026 is $100,000, and a trustee who reads only the statute talks himself out of the exit he actually has.

The court can reach the same result on the same finding, and can replace the trustee instead. MCL 700.7414(2), (3). What this route is not is a way around creditors. Closing a small trust does not erase what the trust owes. Where the shortfall is real, the probate estate and the trust have to be looked at together.

When the Trust Owes More Than It Holds – the Order of Payment Is Fixed

Start with something most trustees get backwards. A revocable trust is liable for the settlor’s estate administration expenses, for enforceable and timely presented creditor claims, and for the homestead, family and exempt property allowances, but only to the extent that the settlor’s property subject to probate administration is insufficient to cover them. MCL 700.7605(1). The trust is the backstop, not the first stop.

Now the part nobody explains. Costs and expenses of trust administration, including the trustee’s compensation and attorney fees, are paid by the trustee before and in preference to the settlor’s estate administration costs, creditor claims, and the allowances. MCL 700.7607(2). If the trust property still cannot pay everything the trust owes after that, the trustee pays in this order:

• Costs and expenses of administering the decedent’s estate.
• Reasonable funeral and burial expenses.
• Homestead allowance.
• Family allowance.
• Exempt property.
• Debts and taxes with priority under federal law.
• Reasonable and necessary medical and hospital expenses of the decedent’s last illness, including compensation of a person who attended the decedent.
• Debts and taxes with priority under other Michigan law.
• All other claims.

Two rules govern inside that list. No charge gets a preference over another charge in the same class, and a charge that is already due gets no preference over one that is not yet due. MCL 700.7607(3). A trustee cannot pay the credit card because it is calling and defer the medical bill because it is not.

How a Trustee Ends Up Personally Liable and How He Avoids It

Once four months have run from the publication of the notice to creditors, the trustee pays the allowed claims in the statutory order, after making provision for administration costs, for reasonable funeral and burial expenses, for claims already presented but not yet allowed, and for unbarred claims that may still come in. MCL 700.7612(1).

The next subsection is the one to read twice. A trustee may pay a claim that is not barred at any time, with or without formal presentation, but he becomes individually liable to another claimant who is injured by that payment in two situations:

1. if he paid before the four months expired without requiring the payee to give adequate security for a refund, or

2. if, through his negligence or willful fault, the payment deprived the injured claimant of priority. MCL 700.7612(2).

That is the whole exposure in one sentence. Paying the sympathetic creditor first, or the one making the most noise, is how a trustee funds the shortfall himself. It is a narrower risk than the general breach of fiduciary duty exposure a trustee carries, and it is almost entirely avoidable by waiting out the claims period and paying in order.

One provision cuts the other way, and trustees rarely know it. A trustee who advances his own money to protect the trust gets a lien on trust property for reimbursement with reasonable interest, and the statute says that is neither self-dealing nor a breach of duty. MCL 700.7709(2), (3). Covering an insurance premium or a tax bill to stop a loss does not make a trustee a volunteer.

The Mortgaged House Worth Less Than the Loan

This is the most common version of an insolvent trust, and the answer surprises people on both sides. If no personal representative has been appointed, the trustee has to publish and serve a notice to creditors himself, in the same manner and with the same duties as a personal representative. MCL 700.7608. A trust does not skip the creditor period.

A creditor who gets that notice and presents nothing within four months is barred, and the bar runs against the trust, every trustee, and the beneficiaries. MCL 700.7610(1). But it does not touch the lien. The statute expressly preserves a proceeding to enforce a mortgage or other lien on property held in the trust. MCL 700.7610(2)(a).

So a lender that sat out the claims period can still foreclose on the house. What it gave up is the shortfall. The claim for the balance, which would have reached the rest of the trust, is gone.

If the lender does present a claim, the arithmetic is set by statute. A secured claim is paid on the full allowed amount if the creditor surrenders the security, and otherwise on the allowed amount less the value of the security, either by exhausting it first or by valuing it through agreement, arbitration, compromise or litigation. MCL 700.7613.

Before a trustee stops paying the mortgage, negotiates a short sale, or signs a deed in lieu, two things need pricing: where that leaves the other creditors in the order above, and what the tax consequence of a forgiven balance is. The second is a question for the accountant, and it should be answered before the paperwork is signed rather than in April.

Frequently Asked Questions About Insolvent Trusts in Michigan

Talk to a Michigan Trust Attorney Before You Pay Anyone

A trustee administering a solvent trust can fix most mistakes. A trustee administering an insolvent one often cannot, because the money he paid to the wrong creditor is gone and the injured creditor has a claim against him rather than against the trust. The order of payment is not intuitive, it puts the trustee’s own administration costs first and the ordinary creditors last, and the statute gives no credit for good intentions.

If you are administering a trust that cannot cover what it owes, the questions worth answering before the next check clears are whether the probate estate has to absorb the claims first, whether the notice to creditors has actually been published, and where each bill you are being pressed to pay sits in the order.

We handle trust administration across Southeast, Central and Mid-Michigan, including trusts that were solvent when the settlor died and are not now. To schedule a consultation, call Boroja, Bernier & Associates at (586) 991-7611.

About the Author

Daniel Boroja, Esq. is a founding partner of Boroja, Bernier & Associates PLLC, where he leads the firm’s estate planning, probate and trust administration, and elder law practice. He has practiced Michigan estate and trust law since 2013 (Bar No. P77079).