Each owner must recognize a gain or loss on the deemed distribution received in liquidation.Such gain or loss is measured by the difference between the fair value of the liquidating distribution and the owner's adjusted basis in the corporation.The objective of a liquidating trust is to help expedite the liquidation of the entity, and allow the owners to recognize gain or loss and to receive proceeds in an orderly manner.In addition, it may be prudent for the fund manager to set aside certain cash reserves before making final distributions to the fund owners.The fair value of the contribution to the liquidating trust would represent the new owner's basis in the liquidating trust.Similarly, in the case of a liquidating distribution from a partnership, the business assets are deemed to have been distributed to the partners and transferred to the liquidating trust.Under Revenue Procedure 82-58, the IRS will issue a private letter ruling if 8 conditions are met.Such conditions include, among other things, that the primary purpose of the trust is liquidation of the assets with no objective of carrying on a trade or business and the trust agreement should contain a fixed or determinable termination date. A "business trust" should be considered instead of a liquidating trust if the purpose of the trust is to carry on a trade or business.
The newly formed trust is governed by a trust agreement executed between the former fund and the trustees before liquidation of the fund.
This reserve could be held in the trust for any contingent liabilities as they become due.
A liquidating trust is a new legal entity that becomes successor to the liquidating fund.
Download PDF When "Liquidating Trust" is mentioned, most people associate this with bankruptcy.
In a bankruptcy, a liquidating trust may be formed whereby certain assets are placed in a trust for the benefit of creditors who may have certain claims against those assets.