Professional Advisors Turn to CSC Trust Company for Liquidating Trust Services

In this current economy, attorneys who counsel distressed companies are turning more and more to liquidating trusts to distribute assets – and they are turning to CSC Trust Company of Delaware for assistance administering these trusts. CSC Trust, a Delaware state-chartered corporate trust company, is a wholly-owned subsidiary of Corporation Service Company.

If the liquidating trust is structured as a Delaware Statutory Trust (DST), CSC Trust can provide resident Delaware trustee services to meet the requirements of the Delaware Statutory Trust Act. In addition, CSC Trust provides administration services in connection with all liquidating trusts, including investment and distribution of liquid assets, reporting of asset values to beneficiaries, distribution of information to beneficiaries, and other services.     

About Liquidating Trusts
In the case of Chapter 11 reorganizations or out-of–court restructurings, using a liquidating trust to distribute the assets of a company (while minimizing tax liability) is becoming more common.  If structured properly, this trust will avoid double taxation to both the trust and the beneficiaries, enabling more cash to be distributed to the beneficiaries.  Very often, liquidating trusts are structured as DSTs to take advantage of the flexibility provided by the Delaware Statutory Trust Act, and the sophistication of the Delaware court system.    

Treasury Regulation Section 301.7701-4(d) provides for the creation of organizations known as liquidating trusts, which are classified as “trusts” under the Internal Revenue Code. The sole purpose of a liquidating trust is to hold and distribute assets, as distinguished from an ongoing business operating for the purpose of generating a profit.  The Internal Revenue Service (IRS) will only classify a particular organization after examining how the trust is conducted. However, the IRS issues advance rulings under Revenue Procedure 94-95 classifying an organization as a liquidating trust if it abides by the following safe-harbor conditions:

• The trust must be established primarily for the purpose of liquidating assets, not conducting a trade or business.
• The Chapter 11 plan must set forth how the transfer of the assets will be treated for federal income tax purposes.
• The trust instrument must provide for the treatment of the trust beneficiaries as grantors.
• The trust must file a grantor trust tax return pursuant to Treasury Regulation 1.671-4(a).
• The trust instrument must provide for consistent valuations of the trust’s assets.
• All of the trust’s income must be treated as subject to tax on a current basis.
• There must be a fixed and reasonable termination date for the trust, generally not more than five years from its date of creation.
• The trust must not receive cash in excess of a reasonable amount to meet claims and contingent liabilities or to maintain the value of its assets during liquidation.
• The permitted investments of the trust are limited to short-term liquid instruments.
• The trust must distribute its income annually, except for amounts to be retained to maintain the value of the assets or meet claims and contingent liabilities.

For more information, e-mail us or call 800.927.9801 ext. 8763 today.