Liquidating trust grantor letter
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.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.In 1994, the Internal Revenue Service (the “IRS”) issued Revenue Procedure 94-45 (“Rev. 94-45”), which established guidelines applicable to liquidating trusts formed to implement a Chapter 11 plan, which are similar to the considerations applicable to a liquidating trust outside bankruptcy. 94-45 lists twelve conditions which, if met, will generally result in the issuance by the IRS of an advance determination classifying the trust as a liquidating trust under Treas. The plan, disclosure statement, and any separate trust instrument must provide for consistent valuations of the transferred property by the trustee and the creditors, and those valuations must be used for all federal income tax purposes.
The creditors become the trust beneficiaries and their claims are paid from trust assets by a waterfall established pursuant to the plan.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).Additionally, exculpation and release provisions provide further liability protection to the liquidating trustee. As the volume of crossborder Chapter 11 cases continues to increase, liquidating trustees prosecuting estate causes of action may face more personal jurisdiction challenges.Liquidating trusts created under bankruptcy plans often vest their trustees with authority to prosecute avoidance and related actions against the creditors and third parties. Bayard’s Bankruptcy Group has long provided services to debtors, official committees of unsecured creditors and equity holders, trustees, purchasers and lenders in bankruptcy cases.