Such agreement provides for trustee duties, compensation of trustees, and governance as well as distributions and other administrative matters.The liquidating trust normally has a lower cost structure than the existing fund and is managed on an "as needed" basis by the trustee as opposed to a full-time basis for the fund.Each owner must recognize a gain or loss on the deemed distribution received in liquidation.
A liquidating trust may also be an effective method for a fund manager to wind down a fund without having a significant role in the liquidation.
At the end of the fund's life cycle or term, the fund manager may have certain assets that are not easily liquidated and convertible into cash for distribution to the owners of the fund.
It may take several years for such assets to be converted into cash.
Such assets may consist of securities that are illiquid or have certain restrictions or monies held in escrow where it will take several years for the conditions to be met for release of such funds.
Over the last decade, a number of firms have been established to provide trustee services in addition to trust departments of banks.
A liquidating trust is generally considered a grantor trust for tax purposes.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.This can result in an otherwise capital receipt being taxed as income.In particular, from 6 April 2016 the definition of a TIS is extended to include: A Targeted Anti-Avoidance Rule (TAAR) has also been introduced to target ‘phoenixing’.A repayment of capital of up to £25,000 to shareholders on striking off is treated as capital for tax purposes.