A QI holding your exchange proceeds should keep them in a segregated escrow or trust account, separate from its operating funds, FDIC-insured up to the coverage limits, backed by fidelity bonding or errors-and-omissions insurance, and subject to controls that block unauthorized access. QI firms have gone bankrupt and faced fraud in the past, costing investors their money, so 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 stretch you have no legal access to the funds. How the QI holds that money, and what happens to it if the firm runs into trouble, is worth verifying before you wire a dollar.
A fund-safety checklist for any QI
Ask these questions before you send proceeds anywhere. The answers should come back specific, immediate, and documented.
1. Is the account segregated?
Your funds should sit in a separate escrow or trust account, not pooled with the QI's operating money or with 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 then hits financial trouble or bankruptcy, your money can be pulled into the firm's general estate and reached by its creditors. Segregation keeps your money legally separate and out of that pool.
The account should be titled in the QI's name in its capacity as qualified intermediary for you, for example "Acme QI Services, as QI for [Your Name]." That titling satisfies the Treasury Regulation requirements for a qualified escrow account or qualified trust.
2. Which bank, and how is the coverage handled?
Your escrow account lives at a bank, and FDIC insurance covers deposits only up to $250,000 per depositor, per bank, per account category. On a six- or seven-figure exchange, that leaves a large uninsured gap.
Ask: "What bank holds my funds? How do you ensure FDIC coverage for amounts above $250,000?"
Responsible QIs close that gap by:
- Spreading deposits across multiple FDIC-insured banks
- Using sweep accounts that automatically distribute balances across institutions
- Using banks in reciprocal deposit networks such as IntraFi
A QI should be able to walk you through its exact arrangement.
3. Does it take two people to release a wire?
No single person at the QI should be able to move your funds alone. Dual approval means at least two authorized officers sign off on every wire disbursement.
Ask: "How many people must approve a wire release from my account? What is the approval workflow?"
4. Are the disbursement procedures written down?
The QI should have documented procedures for releasing funds, and they should spell out:
- What written authorization it needs from you before money moves
- How it confirms an instruction is genuine (a phone callback to a number already on file, not the number in the email requesting the wire)
- What audit trail it keeps for every disbursement
Ask: "Can I see your written disbursement procedures before I sign the exchange agreement?"
5. Is there a fidelity bond?
A fidelity bond covers losses from theft, fraud, or dishonesty by the QI's own employees. If an employee diverts your funds, the bond pays the claim up to its limit.
Ask: "What is your fidelity bond coverage amount? Can I see a certificate of insurance?"
The limit should track the volume of client money the firm holds. A $100,000 bond at a firm holding $50 million in client funds is not meaningful protection.
6. Is there errors-and-omissions insurance?
Errors-and-omissions (E&O) insurance covers processing mistakes rather than theft: 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. Is the firm independently audited?
QIs handling significant volume should undergo an annual independent financial audit or maintain a SOC 1 or SOC 2 report, an outside auditor's examination of whether the firm's internal controls actually work as described.
Ask: "Are your financials independently audited? Do you maintain a SOC report? Can I review it?"
8. How does the firm defend against wire fraud?
Wire fraud aimed at 1031 transactions is a growing threat, and the QI should have specific defenses:
- Multi-factor authentication on all accounts
- Encrypted email for sensitive documents and wire instructions
- Employee training on phishing and business email compromise, the scam where a criminal poses as a trusted party by email to redirect a payment
- Verified phone-callback procedures for every wire instruction, never email alone
Ask: "What cybersecurity measures do you have in place to prevent business email compromise and wire fraud?"
For more on protecting yourself during the exchange, see the wire fraud prevention guide.
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 |
If concerns come up mid-exchange
If you start to worry about the safety of your funds while the exchange is underway:
- Go to the QI first. Ask specific questions about account status, segregation, and controls, and request written confirmation.
- Escalate if the answers fall short. Take unsatisfactory responses to the firm's compliance officer or a principal.
- Hold off on wiring more funds until your concerns are resolved.
- Consult your CPA or attorney. They can assess the QI's practices and advise on next steps.
- Weigh changing QIs. The IRS permits QI replacement during an exchange, and protecting your funds can matter more than avoiding disruption.
When the answers add up
These fund-safety questions overlap with the wider evaluation in the choosing a qualified intermediary guide. When every answer on this checklist comes back clear, specific, and documented, you have verified the custody and controls protecting your proceeds, and you can make the wiring decision with a full picture rather than a leap of faith.
A QI's main job is holding your money safely until you identify and close on replacement properties, and none of the safeguards that make that possible are automatic. Ask about fund segregation, insurance, banking, and controls, and treat a red flag as a reason to escalate or to look at replacing the QI.
Frequently asked questions
What does "segregated" mean for QI funds?
Segregated funds sit in a separate escrow or trust account held in the QI's name, not mixed in with the QI's operating money or other clients' funds. That separation protects your money if the QI runs into financial trouble.
How is my money insured if held with the QI?
FDIC insurance covers bank deposits up to $250,000 per depositor, per bank. Above that, a QI can spread the balance across multiple banks or arrange insured-deposit coverage through its bank.
What is a fidelity bond for a qualified intermediary?
A fidelity bond is insurance that covers theft, embezzlement, or fraud by the QI or its employees. It protects you if the QI misappropriates your funds, up to the bond's limit.
Are there red flags I should watch for in QI fund safety?
Yes. Warning signs include a refusal to answer fund-safety questions, no insurance or bonding, commingled funds, unaudited financials, unusually low fees, and pushback on standard controls.
What should I do if I suspect my QI is not protecting funds safely?
Contact the QI right away and ask specific questions, and hold off on wiring any more funds until you have answers. If the responses don't satisfy you, you can escalate within the firm or consider changing QIs, and your CPA or attorney can advise on the next step.