INSIST on a Segregated 1031 Exchange Account

There is a very good article on Summit 1031 Exchange in the Bend Bulletin Friday, February 14th edition. We've previously spoken about firms that held themselves out as Qualified Intermediaries who didn't disclose or have misrepresented where investor client money was held. We've also spoken about industry-led legislation - both at the state and national level - trying to curtail the irresponsible practice of "investing" escrowed funds in anything but completely safe, liquid accounts. Intermediaries that hold investment funds in anything outside of cash equivalent, segregated bank accounts, in any prudent investor's opinion, are simply playing games with your money.

1031 Corporation has always held each exchange client's funds in a segregated bank account at our FDIC-insured parent company, FirstBank. FirstBank is participating in the FDIC’s Transaction Account Guarantee Program. Under that program, through June 30, 2010, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account. While most banks can only insure up to $250,000 of your money through the FDIC, FirstBank's 25 separate charters also make it possible for your interest-bearing 1031 proceeds to be insured up to $6.25 M.

Many Qualified Intermediaries will talk about the amount of 1031 Corporation fidelity bonding they have (1031 Corporation has $25 M). However, most don't discuss that bonding typically involves theft of an employee or officer and covers the FIRM, not the client. While this gives added financial capacity for a company to recover any lossed money, a firm that exceeds this loss or is unwilling, or unable, to honor their contractual obligation to the client has to be sued. In the cases of convict Ed Okun's 1031 Tax Group and LandAmerica Exchange Co, losses far exceeded the bonding - forcing the company into bankruptcy. It is then up to a bankruptcy court to allocate the recovery of funds. As we saw in the LandAmerica case, significantly greater weight in that allocation came from the clients that had insisted on segregated accounts. Of course, had LandAmerica held all accounts in segregated bank accounts, rather than the Auction Rate Securities (ARS) market, those losses probably wouldn't have occured in the first place.

Like any other company you do business with, you should check out and be comfortable dealing with that company. Whether it's a bank you deposit your money in, an insurance provider you buy coverage from, or a retailer you buy goods at, you should always be confident that you are making the best decision before you do business with them. Reputation, financial capacity to honor claims and their ability to perform to your satisfaction are of utmost importance. In completing a 1031 exchange, I, personally, wouldn't have my QI hold my proceeds in anything but a liquid bank account. You should insist on the same!