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Trust Agreement

A Trust Agreement is a foundational legal document that creates and governs the operation of a Delaware Statutory Trust. The DST is a legally recognized trust set up for the purpose of business, especially investment and finance, and is governed under Delaware state law.

Here are the key elements typically outlined in a DST Trust Agreement:

  1. Creation of the Trust: The agreement sets forth the terms under which the trust is created and identifies the initial trustee and the name of the trust.
  2. Appointment of Trustee(s): It designates the trustee or trustees responsible for managing the trust’s affairs and specifies their powers, obligations, and limitations.
  3. Beneficial Interests: The agreement defines the beneficial interests, which represent the investors’ stakes in the trust. These interests are often treated as personal property and can be freely transferred, subject to any restrictions set forth in the agreement.
  4. Purpose and Powers: The document states the specific purpose of the trust, which in the case of a DST is typically related to holding title to income-producing real estate, securitization of assets, and other investment ventures. It also delineates the powers of the trust to buy, sell, and manage real estate and other assets, enter into contracts, obtain financing, and distribute income to beneficiaries.
  5. Governing Provisions: The Trust Agreement contains provisions for the operation of the trust, including the rights and obligations of the trustee and the beneficiaries, distribution of income, and administrative matters such as reporting requirements and tax matters.
  6. Duration of the Trust: The document will state the duration of the trust, which could be perpetual or for a specific term.
  7. Dissolution and Termination: Conditions under which the trust may be dissolved and the procedures for termination and distribution of assets to the beneficiaries are outlined.
  8. Amendments: The Trust Agreement will typically include a clause about how it can be amended, which generally requires consent from a majority or supermajority of the beneficial interest holders.
  9. Miscellaneous Provisions: This includes various other terms and conditions that govern the operation of the DST, such as dispute resolution procedures, indemnification of the trustee, and the law governing the trust.

The DST is favored in certain investment circles, particularly in real estate, for its flexibility, the limited personal liability (similar to that of a limited partnership), and the potential tax benefits under the United States tax code. Because of these benefits, the Delaware Statutory Trust is commonly used for 1031 exchanges, which allow investors to defer capital gains taxes on the exchange of like-kind properties.

The Trust Agreement is crucial because it lays out the roadmap for the DST’s activities and is the primary source of authority for the trustees’ actions. Investors in a DST should thoroughly review and understand the Trust Agreement, as it details their rights, potential returns, and the risks involved in their investment.