QI Fund Safety: Segregated Accounts, Controls, and Red Flags
10 min read · Planning & Execution · Last updated
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Key Takeaways
A qualified intermediary holding your exchange proceeds should segregate funds in an escrow or trust account, separate from the QI's operating funds. The account should be FDIC-insured (up to limits), backed by fidelity bonding or errors and omissions insurance, and subject to rigorous controls preventing unauthorized access. Many QI service providers have gone bankrupt or faced fraud, resulting in investor losses. Due diligence on fund safety is essential.
Your qualified intermediary holds your exchange proceeds — often six or seven figures — for up to six months. During that period you have no legal access to the funds. The due-diligence questions below are designed to verify that your QI's custody practices meet the standard this responsibility demands.
Fund-safety due-diligence checklist
Before wiring proceeds to any QI, confirm the following. The answers should be specific, immediate, and documented.
1. Segregated account structure
Your funds must be held in a separate escrow or trust account, not commingled with the QI's operating funds or other clients' exchange funds.
Ask: "Will my funds be held in a segregated account established specifically for my exchange, or in a pooled account with other clients?"
Why it matters: If a QI commingles funds and faces financial difficulty or bankruptcy, your money may be treated as part of the QI's general estate. Segregation provides legal separation, making your funds unreachable by the QI's creditors.
The account should be labeled in the QI's name in their capacity as qualified intermediary for you (e.g., "Acme QI Services, as QI for [Your Name]"). This satisfies Treasury Regulation requirements for a qualified escrow account or qualified trust.
2. Bank name and FDIC coverage
Your escrow account is held at a bank. FDIC insurance covers deposits up to $250,000 per depositor, per bank, per account category. For larger exchange amounts, the coverage gap is significant.
Ask: "What bank holds my funds? How do you ensure FDIC coverage for amounts above $250,000?"
Responsible QIs address coverage gaps by:
- Spreading deposits across multiple FDIC-insured banks
- Using sweep accounts that automatically distribute balances across institutions
- Using banks that participate in reciprocal deposit networks (such as IntraFi)
A QI should be able to explain their specific banking arrangement clearly.
3. Dual-approval wire disbursement
No single person at the QI should be able to move your funds unilaterally. Require that at least two authorized officers approve every wire disbursement.
Ask: "How many people must approve a wire release from my account? What is the approval workflow?"
4. Written disbursement procedures
The QI should have documented, written procedures for how funds are released. These procedures should specify:
- What written authorization is required from you before funds move
- How the QI verifies that instructions are authentic (phone callback to a number already on file, not to a number in the email requesting the wire)
- What audit trail is maintained for every disbursement
Ask: "Can I see your written disbursement procedures before I sign the exchange agreement?"
5. Fidelity bond
A fidelity bond covers losses from employee theft, fraud, or dishonesty within the QI firm. If an employee diverts your funds, the bond pays the claim up to the policy limit.
Ask: "What is your fidelity bond coverage amount? Can I see a certificate of insurance?"
The coverage amount should be proportional to the volume of client funds the QI holds. A $100,000 bond on a firm holding $50 million in client funds does not provide meaningful protection.
6. Errors-and-omissions (E&O) insurance
E&O insurance covers processing mistakes: a missed deadline, a misrouted wire, a paperwork error that damages your exchange.
Ask: "What is your E&O policy limit? Is the policy current?"
7. Independent audit or SOC report
QIs that handle significant transaction volume should undergo annual independent financial audits or maintain a SOC 1 or SOC 2 report. These provide third-party verification that the QI's internal controls operate as described.
Ask: "Are your financials independently audited? Do you maintain a SOC report? Can I review it?"
8. Cybersecurity controls
Wire fraud targeting 1031 transactions is a growing threat. The QI should have specific protections in place:
- Multi-factor authentication on all accounts
- Encrypted email for sensitive documents and wire instructions
- Employee training on phishing and business email compromise
- Verified phone-callback procedures for all wire instructions (never relying solely on email)
Ask: "What cybersecurity measures do you have in place to prevent business email compromise and wire fraud?"
See the wire fraud prevention guide for additional detail on protecting yourself during the exchange.
Red flags
| Indicator | Concern |
|---|---|
| QI cannot name the bank holding your funds | Lack of transparency about basic custody |
| Funds are commingled with operating accounts or other clients | Your money is exposed in a QI bankruptcy or financial difficulty |
| No fidelity bond or E&O insurance | No safety net if something goes wrong internally |
| No dual-approval process for wire disbursements | A single employee can move funds unilaterally |
| QI is evasive or dismissive when asked about fund safety | If they cannot answer clearly, the controls may not exist |
| QI's financials are not independently audited | Reduced assurance that internal controls are functioning |
| Fees are significantly below market | May indicate the QI is cutting corners on compliance, insurance, or staffing |
What to do if concerns arise during the exchange
If at any point during your exchange you develop concerns about the safety of your funds:
- Contact the QI directly. Ask specific questions about account status, segregation, and controls. Request written confirmation.
- Escalate if necessary. If the QI's responses are unsatisfactory, contact their compliance officer or firm principal.
- Do not wire additional funds until your concerns are resolved.
- Consult your CPA or attorney. They can evaluate the QI's practices and advise on next steps.
- Consider changing QIs. The IRS permits QI replacement during an exchange. Protecting your funds is more important than avoiding disruption.
Selecting a QI with confidence
The fund-safety questions above overlap with the broader QI evaluation covered in the choosing a qualified intermediary guide. When the answers to every question on this checklist are clear, specific, and documented, you can wire proceeds with confidence that your funds will be intact when you are ready to close on your replacement property.
The Bottom Line
The QI's primary responsibility is holding your money safely until you identify and close replacement properties. Don't assume this happens automatically. Ask questions about fund segregation, insurance, banking, and controls. Red flags should trigger immediate escalation or QI change.
Frequently Asked Questions
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