Liquidating trust agreement

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.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.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.A business trust is either treated as a corporation or partnership for federal income tax purposes.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.

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.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 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.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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