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Covenant mutual liquidating trust, settlement Agreement

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What Is a Liquidating Trust?

The trustee takes control of the newly formed liquidating trust. 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.

The fair value of the contribution to the liquidating trust would represent the new owner's basis in the liquidating trust. The newly formed trust is governed by a trust agreement executed between the former fund and the trustees before liquidation of the fund.

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Thus, the partner's basis in the property can never be greater than the partner's basis in the partnership. 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. Such assets may consist of securities that are illiquid or have certain restrictions or monies held in escrow where it will take several years for the conditions to be met for release of such funds.

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Also, if the time period is unreasonably prolonged, the status of the entity may change from a liquidating trust. The remaining assets and liabilities are transferred into the newly formed trust and the former owners of the liquidating fund become unit holders or beneficiaries of the trust.

Fund Managers Tax Implications of a Liquidating Trust

This reserve could be held in the trust for any contingent liabilities as they become due. The trust will be considered a liquidating trust with the primary purpose of liquidating its assets. 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.

What Is a Liquidating Trust?

At the end of the fund's life cycle or term, the fund manager may have certain assets that are not easily liquidated and convertible into cash for distribution to the owners of the fund. In addition, it may be prudent for the fund manager to set aside certain cash reserves before making final distributions to the fund owners. It may take several years for such assets to be converted into cash. Each owner must recognize a gain or loss on the deemed distribution received in liquidation. Such agreement provides for trustee duties, compensation of trustees, and governance as well as distributions and other administrative matters.

Should the purpose of the entity change, such as to carry on a for-profit business, then the entity will no longer be considered a liquidating trust. Tax implications of a liquidating trust A liquidating trust is generally considered a grantor trust for tax purposes. Conclusion As noted, the use of a liquidating trust may be a cost efficient method to liquidate certain assets. However, as with new legal entities, taking a year off from dating to engagement fund managers should consult with tax advisors before embarking on a liquidating trust to make sure that this type of entity makes sense for the situation.

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Settlement Agreement