Tax treatment of liquidating trusts

For questions concerning insolvency law, including US bankruptcy law and insurance company insolvency law, please contact Ashley Stitzer at (302) 429-4242 or [email protected] liquidating trust can also be a useful tool outside of bankruptcy.

For questions concerning insolvency law, including US bankruptcy law and insurance company insolvency law, please contact Ashley Stitzer at (302) 429-4242 or [email protected]A liquidating trust can also be a useful tool outside of bankruptcy.For an entity with a complicated asset portfolio, it may make sense to transfer all assets, rights, and causes in action to a liquidating trust that can liquidate assets and investments over time, avoiding market dips and other timing concerns.

If the plan fails to sufficiently preserve the claim, the claim may be subject to an attack on the basis of subject matter jurisdiction.

The degree of specificity required in identifying preserved claims varies from jurisdiction to jurisdiction.

A trustee qualifies as a representative of the estate if a successful recover would benefit, directly or indirectly, the debtor’s the creditors that are beneficiaries of the trust. The transfer will be treated as a deemed transfer to the beneficiary-creditors followed by a deemed transfer by the beneficiary-creditors to the trust.

Treasury Regulation 301.7701-4(d), 26 CFR § 301.7701-4(d) (“Treas. 301.7701-4(d)”) provides for establishment of a liquidating trust as a grantor trust, such that it will be a pass-through entity for tax purposes, without an entity-level tax. The plan, disclosure statement, and trust agreement must provide that the beneficiaries of the trust will be treated as the grantors and deemed owners of the trust and that the trust instrument (or plan if a separate trust agreement does not exist) requires the trustee to file returns for the trust as a grantor trust pursuant to section 1.671-4(a) of the Income Tax Regulations, 26 CFR § 1.671-4(a).

Other timing considerations may be presented by contingent, unliquidated or unmatured claims.

As reflected on the below chart, Delaware corporations, partnerships and limited liability companies must make reasonable reserve for all pending litigation, and for claims and obligations that have not yet accrued but, based upon facts known to management, are likely to accrue within ten years following the dissolution.

The dissolution procedures for a business organization vary, depending on the type of entity and the jurisdiction in which it is formed.

For example, as shown on the below chart, a Delaware corporation continues to exist for a period of three years following the filing of a certificate of dissolution, but a Delaware partnership or limited liability company’s legal existence continues indefinitely following an event of dissolution, until a certificate of cancellation is filed.

Additional considerations include retaining bankruptcy court jurisdiction in the plan and trust agreement so that a liquidating trustee can seek court approval of certain actions and decisions made on behalf of the trust.

An oversight committee is often utilized as well to oversee the liquidating trustee’s certain decisions and actions.