Tax Implications of Liquidating Trusts for Bankrupt and Distressed Companies

Characterization of the Trust, Income Taxes, Net Operating Losses, Filing Requirements

Recording of a 90-minute premium CLE/CPE video webinar with Q&A


Conducted on Thursday, March 11, 2021

Recorded event now available

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Course Materials

This CLE/CPE course will guide tax professionals and advisers with an in-depth analysis of tax implications of liquidating trusts for bankrupt or distressed companies. The panel will discuss key tax considerations in forming liquidating trusts to settle certain debts, collecting and holding assets, and liquidating assets. The panel will also discuss the classification of the trust for tax purposes, income tax filing requirements, and other key tax considerations of liquidating trusts.

Description

A liquidating trust can be used to facilitate the winding down or reorganization of a bankrupt or distressed company. The structuring and administration of a liquidating trust has wide-ranging tax implications that must be carefully considered by tax professionals, advisers, and fiduciaries.

Liquidating trusts allow debtors an alternative under circumstances where assets cannot be sold in a Section 363 or other sale. A liquidating trust must be structured to liquidate assets and avoid carrying on a profit-making business to be characterized as a grantor trust for purposes of the Code, along with other critical requirements.

These trusts are separate legal entities with complex tax filing requirements with minimal guidance from the IRS. Most liquidating trusts are crafted with the intent of being classified and filed as a grantor trust or a complex trust under Treas. Reg. Sec. 1.671-4(a) using Form 1041. However, under certain circumstances, the trust may be established and filed as a qualified settlement fund using Form 1120SF. If classified as a grantor trust, it will be a disregarded entity with all income, deductions, and credits treated as belonging to and reportable by the grantor.

Listen as our panel discusses debtor/creditor status prior to formation, tax issues in forming liquidating trusts to settle certain debts, collecting and holding assets, and liquidating assets. The panel will also provide an in-depth analysis of the trust classification, filing requirements, and other related challenges.

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Outline

  1. Debtor/creditor status prior to trust formation
  2. Structuring a liquidating trust
    1. Formation
    2. Fiduciary responsibilities
    3. Characterization of the trust
  3. Liquidating trust transactions
  4. Income tax compliance and filing requirements

Benefits

The panel will review these and other key issues:

  • When would a liquidating trust best be utilized?
  • What are the key considerations in structuring liquidating trusts for bankrupt and distressed companies?
  • What are the tax implications of liquidating trusts?
  • What is the interplay between liquidating trusts and grantor trust rules, and what challenges arise?
  • What are the income tax compliance rules, filing requirements, and pitfalls to avoid for liquidating trusts?

Faculty

Angstadt, Brian
Brian Angstadt

Senior Manager
Grant Thornton

Mr. Angstadt is a Senior Manager in our Mergers and Acquisitions Tax Services in Atlanta, GA. For over 14 years, he has...  |  Read More

Sanderson, Cherie
Cherie K. Sanderson

Tax Director
Grant Thornton

Ms. Sanderson has an extensive trust background and has been involved in bankruptcy trust work for several years. She...  |  Read More

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