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 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.
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.
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.
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.