Investing company liquidating trust
The liquidating trust normally has a lower cost structure than the existing fund and is managed on an "as needed" basis by the trustee as opposed to a full-time basis for the fund.
The trustee takes control of the newly formed liquidating trust.
The role of the trustee of the liquidating trust is to administer and manage the liquidating trust, sell assets, pay creditors, resolve any claims and distribute any available funds to the beneficiaries of the trust.
Over the last decade, a number of firms have been established to provide trustee services in addition to trust departments of banks.
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.
Also, if the time period is unreasonably prolonged, the status of the entity may change from a liquidating trust.
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 fair value of the contribution to the liquidating trust would represent the new owner's basis in the liquidating trust.
This reserve could be held in the trust for any contingent liabilities as they become due.
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.
It may take several years for such assets to be converted into cash.
However, to receive this favorable tax treatment, a trust must qualify as a liquidating trust.
Without the benefit of insurance, a challenge to a trust’s status could lead to the diminution in value of the trust assets, or worse, if the challenge is made after funds have been distributed, there may not be sufficient trust assets to defend such challenge, or pay any tax, interest or penalties, and the practical recovery of funds from beneficiaries may be difficult.
Since the business assets are deemed to have been distributed to the owners and then transferred to the liquidating trust, there will be an immediate recognition of a gain or loss from liquidation of the former business by the owners.