Insist your QI Hold Funds in a Segregated Exchange Account

Qualified Intermediaries (“QIs”) use a variety of ways to bank and invest funds they hold in escrow or trust for their 1031 Exchange clients. QIs have a fiduciary responsibility to hold client funds in a safe and liquid manner. At the present time there is no industry standard for how funds should be held by QIs or how funds should be invested. The most common ways are as follows -

Segregated Accounts – Many QIs, like 1031 Corporation, open separate bank accounts for each 1031 file that they open. The accounts are usually money market accounts which are under FDIC protection and are opened in the name of the QI as escrow holder for the client and include the client’s federal identification number. The accounts usually bear interest which is reported on year end Form 1099 to the client.

Pooled Accounts – Many QIs pool all of their client 1031 funds into one bank account or investment. This is the common way large QIs manage money they hold for their clients. Many smaller QIs also use this method of holding 1031 funds.

Several recent scandals and failures in the 1031 Exchange industry have occurred with QIs using pooled accounts. In some instances, the pooled accounts were invested in other companies owned by the owner of the Qualified Intermediary company. In other instances, the pooled accounts were reinvested in securitized investments which have lost value in the current financial “melt down.”

Land America is apparently the latest casualty of the Pooled Account type of QI. They are reported to be holding $290 million of client exchange funds invested in securitized investments called Auction Rate Securities. The securities have become illiquid and Land America is attempting to meet client obligations from other operating accounts.

Our recommendation is to always insist that your QI hold your 1031 funds in a segregated account subject to FDIC protection.