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.
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.
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.
The basis of property received in complete liquidation of a partner's interest is the adjusted basis of the partner's interest in the partnership, reduced by any money distributed in the same transaction.
Thus, the partner's basis in the property can never be greater than the partner's basis in the partnership.
If a trust is created outside of Chapter 11 of the Bankruptcy Code, a private letter ruling may be requested if conditions of Revenue Procedure 82-58 are met.However, as with new legal entities, 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.Garth Puchert, Audit Partner of Eisner Amper's Financial Services Group, is primarily devoted to private equity funds, registered investment companies, investment advisors, mutual funds, hedge funds and broker-dealers in securities.A liquidating trust may also be an effective method for a fund manager to wind down a fund without having a significant role in the liquidation.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.
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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.