Upon the deemed contribution of the assets to the liquidating trust, the trust will have the same adjusted bases in its assets as the partners had in those assets immediately prior to the transfer to the trust.
Conclusion As noted, the use of a liquidating trust may be a cost efficient method to liquidate certain 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.
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.
However, a partner generally must recognize gain on the distribution of property (other than money) if the partner contributed appreciated property during the 7-year period before the distribution.
A partnership generally does not recognize gain or loss because of distributions it makes to partners.
Thus, the partner's basis in the property can never be greater than the partner's basis in the partnership.Over the last decade, a number of firms have been established to provide trustee services in addition to trust departments of banks.A liquidating trust is generally considered a grantor trust for tax purposes.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.
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.