Liquidating trust and taxable event

05 Dec

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. Liquidating trusts can be effective tools to wind down any business enterprise, including debtors in Chapter 11 bankruptcy cases and entities that dissolve outside of bankruptcy. To that end, in a Chapter 11 case, a debtor’s exclusive right to file a plan is limited to 120 days (subject to extensions for cause), but once a plan is confirmed, the bankruptcy estate ceases to exist and the debtor loses its status as debtor in possession, including its authority to act as a bankruptcy trustee and pursue estate claims. Norton Liquidating trusts are organized for the primary purpose of liquidating assets transferred to them for distribution to trust beneficiaries. The US Bankruptcy Code seeks to promote the effective administration and settlement of a debtor’s assets and liabilities within a limited frame of time.

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Failure to make “reasonable reserve” is a basis for liability on the part of the person(s) conducting the liquidation.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.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.Moreover, to the extent that entities like partnerships and limited liability companies are not permitted to engage in business once they are dissolved, the liquidating trust may be authorized to operate or hold certain assets to take advantage of economic factors (but subject to tax considerations).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.Whether the trust is the product of a bankruptcy plan or a state law plan of dissolution, certain factors must be considered. Section 1123(b)(3)(B) of the Bankruptcy Code allows this prospect to be avoided.To find out more, Lawyer Monthly hears from Ashley B. It states that a plan may provide for the retention and enforcement by the debtor, by the trustee, or by a representative of the estate appointed for such purpose, of any such claim or interest.