There is a stretch in every exchange that owners rarely think about until it is happening. Your property has sold. The proceeds, possibly the largest single sum you will ever handle, are gone from your control and sitting in an account belonging to a company you likely met a few weeks ago.
You cannot touch that money. That is the whole point: taking control of it collapses the exchange. So for anywhere from a few days to six months, your net worth is somewhere else, and the only question that matters is whether it will still be there when you need it.
Most of the time it is. But the reason to ask hard questions up front is that the protections people assume exist mostly do not.
The uncomfortable structural fact
A qualified intermediary is not a bank. There is no federal licensing requirement to be one, and no federal regulator supervising how client funds are held. A handful of states impose requirements, but the baseline is thin.
That means the safety of your money is not guaranteed by a regulator. It is determined by how a particular company chooses to operate, and by whether anyone asked before the wire went out.
The 2008 case that settled the argument
The clearest illustration came when LandAmerica 1031 Exchange Services collapsed during the financial crisis. Exchangers had funds sitting with it, and the bankruptcy court had to decide who owned what.
The outcome split along one line: how the money had been held.
Roughly fifty investors had insisted on explicitly segregated accounts. Their funds were recognized as held in trust, and they recovered their capital. The four hundred, plus investors whose money had been commingled in the company's general accounts were treated as holding corporate funds subject to creditor claims. They faced a long, uncertain recovery, and some of that capital went to other lienholders.
Same product, same firm, same moment. The difference was a structural choice made before anyone knew it would matter.
The three questions that actually protect you
- Are funds held in a segregated qualified trust account, in my name? This is the big one. Money held in a qualified trust or escrow account is treated as fiduciary funds, which is what keeps it out of the intermediary's bankruptcy estate. Commingled money sitting in a company operating account is exposed. Ask for it in writing, and ask which institution holds it.
- Do you carry a fidelity bond, and for how much? People conflate two different protections. Errors and omissions insurance covers unintentional mistakes: a missed deadline, a botched document. Fidelity bonding covers intentional acts: fraud, theft, forgery. An intermediary can have generous E&O and no meaningful protection against someone inside the company stealing. Ask about both, and about the coverage amounts relative to what they hold.
- Who has to sign to move my money? Dual authorization, and ideally your written consent, is the practical control that prevents a single person from moving funds.
| Protection | What it covers | What it does not |
|---|---|---|
| Segregated qualified trust account | Keeps funds out of the QI's bankruptcy estate | Fraud by someone with access |
| Fidelity bond | Theft, fraud, forgery | Ordinary mistakes |
| Errors and omissions insurance | Unintentional errors | Intentional wrongdoing |
| Dual authorization | Unilateral movement of funds | Institutional insolvency |
Why the cheapest intermediary is rarely the bargain
QI fees are small relative to the sums involved, which we covered in what an exchange actually costs. Segregated accounts, real bonding, and proper controls cost money to maintain, and a firm competing purely on price is economizing somewhere.
Weigh that against what is at stake. Saving several hundred dollars on the intermediary while millions sit in a commingled account is not a saving; it is an uncompensated risk. And unlike most exchange risks, this one has nothing to do with the tax code. A failed exchange at least leaves you with your money and a tax bill. A failed intermediary can leave you without either.
What we do about it
We ask these questions before a client's funds go anywhere, we ask for the answers in writing, and we confirm the account structure rather than taking a brochure's word for it. Intermediary selection is not an administrative step near the end; it is one of the first real decisions in an exchange, which is why it sits early in our exchange process.
If your exchange is already underway and you are not certain how your funds are held, ask today. You are entitled to know, and a good intermediary will answer plainly and immediately. Hesitation is itself information.
Questions we field about intermediary safety
Are qualified intermediaries regulated?
Not at the federal level. There is no federal licensing requirement or federal oversight of how QIs hold client funds. Some states impose requirements, but protection largely depends on how the individual firm operates.
What is a segregated qualified trust account?
An account holding your exchange funds separately, treated as fiduciary rather than corporate money. That distinction is what generally keeps the funds out of the intermediary's bankruptcy estate.
What happened in the LandAmerica case?
Investors with explicitly segregated accounts had funds recognized as held in trust and recovered their capital. Those whose funds were commingled were treated as general creditors and faced a much longer, less certain recovery.
What is the difference between E&O and a fidelity bond?
Errors and omissions insurance covers unintentional mistakes. A fidelity bond covers intentional acts such as fraud or theft. You want to know about both, including coverage amounts.
Can I check how my funds are held mid-exchange?
Yes, and you should. Ask which institution holds the account, whether it is segregated in your name, and who must authorize a transfer. A reputable intermediary will answer without hesitation.