Segregated funds vs dual-signature controls

Two questions, not one product

Treas. Reg. §1.1031(k)-1(g)(3) describes a qualified escrow account and a qualified trust: the escrow holder or trustee is not the taxpayer or a disqualified person, and the taxpayer’s rights to receive, pledge, borrow, or otherwise obtain the benefits of the cash or other property are limited as provided in (g)(6). Paragraph (g)(4) describes the qualified-intermediary safe harbor. Those paragraphs are about constructive receipt for federal income tax. They are not a full banking-control specification, and they are not a federal custody license.

Operator diligence still has to ask: is this cash in an account the QI’s creditors, employees, or operating ledger can reach as if it were company money? And can one person at the QI instruct the bank to send it? Those are the segregation question and the dual-signature question.

What segregation is — and is not

Segregation means exchange proceeds are identified to the taxpayer (by name, tax identification, or a qualified escrow/trust) and are not deposited into the QI’s operating account. Several state facilitator statutes say that in those words. California Financial Code §51009, on the cited chapter, forbids commingling exchange funds with operating accounts and forbids lending or transferring exchange funds to affiliates except as needed for an exchange accommodation titleholder. Colorado’s §6-1-721 forbids commingling with operating accounts and addresses aggregation of exchange funds with subaccounting that tracks each client. Nevada’s NRS 645G.350–.360, on the cited chapter, requires a separate federally insured trust or escrow and forbids commingling.

Aggregation with a subledger is not the same sentence as “each taxpayer has a unique bank account number.” A firm can hold multiple exchanges at one bank with book-entry subaccounts. That can still be “not commingled with operating” under a statute that allows aggregation. It can still fail a closer who asked for a TIN-titled account the taxpayer can see on a bank statement. Washington’s RCW 19.310.040, for covered facilitators, requires a separately identified account using the taxpayer’s taxpayer identification number, with the taxpayer as a named beneficiary, plus a path to a client bank statement when the qualified-escrow alternative is used. That is Washington’s text — not a national titling rule.

Segregation is also not FDIC insurance of the entire exchange, not proof the bank will refuse a single-officer wire, and not proof the QI has current fidelity coverage. Those are separate facts. The QI File’s directory “Segregated” column is a publication flag: the firm said funds are not commingled with operating accounts, usually in TIN-titled escrow or trust. See How to read a listing.

What dual-signature actually controls

Dual written authorization means a withdrawal requires more than one person’s writing. In the Treasury (g)(3) qualified-escrow / qualified-trust story, the taxpayer’s ability to reach the cash is already limited by (g)(6). In state facilitator statutes, dual authorization often appears as one of several alternatives to posting a large fidelity bond: California §51003, Colorado §6-1-721, Connecticut §36a-832, Maine §1397, and Oregon ORS 673.810 all treat qualified escrow/trust plus dual written authorization as a statutory option. That does not mean every QI in those states uses that option. Some post a bond instead. Ask which alternative this file uses.

Colorado’s cited section also requires dual authorization on transfers of exchange funds over $250,000 when that statute applies. Do not copy that dollar figure onto a California or Nevada file. Virginia’s chapter, as fetched, requires a separately identified account with dual written authorization or a qualified escrow/trust, and states a $250,000 E&O (or cash/LOC) requirement — it does not, on the text we opened, state a fidelity-bond minimum. See the state bonding overview for citations and as-of dates.

Ask the QI, in writing: who are the authorized signers; can a single employee release funds; does the deposit bank require two tokens or two wet signatures; is the second signer the taxpayer, a second QI officer, or an independent escrow/trustee; and will you receive statements. “We have internal dual control” that never reaches the bank is a weaker fact than a bank-enforced dual authorization. This page does not rate which is “enough.”

Why both matter

A segregated account that one officer can wire is still a single-key vault. A dual-signature process on an operating or omnibus account still leaves exchange cash on a ledger that may be reachable in a QI failure, depending on how the account is titled and what the bank’s records show — a fact pattern for counsel, not a conclusion this directory will draw. Theft, social-engineering wires, and insolvency are different failure modes. Segregation is aimed at commingling and operating-account risk. Dual-signature is aimed at unauthorized disbursement. Fidelity (employee dishonesty / crime) and E&O (professional mistakes) are insurance products that respond, if at all, after the fact, subject to the actual policy. None of those substitutes for the others.

The (g)(6) restrictions are about the taxpayer not being able to grab the cash mid-exchange. Dual-signature is often about the QI not being able to grab it alone. Those are opposite directions of the same wire. Ask both.

What a parent logo does not prove

QI sites often lead with a bank holding company, a title-insurance family, or a national settlement brand. That can be a real corporate-control fact — the directory’s “parent” column records what the firm publishes. It does not prove:

• that exchange funds are on the parent’s balance sheet or in a bank-owned qualified trust;
• that the parent’s regulators examine the QI book;
• that the parent’s fidelity program names your exchange account as insured property;
• that the wire room that will move your funds is the parent’s wire room;
• that dual authorization exists at the deposit bank rather than only in a slide deck.

Affiliated entities can be excluded from some state “exchange facilitator” definitions, or can be the permitted EAT vehicle. That is statute-specific (see Colorado’s owned-entity carve-out in §6-1-721(2)(c)(II)(E) on the cited text). It is not a reason to skip the title, signer, and certificate questions. How to put those questions in order is on How to choose a QI.

What to request before you wire

• Exact account title and TIN as they will appear on the statement.
• Whether the structure is a unique deposit account, a qualified escrow/trust, or a pooled account with subaccounting — in one written sentence.
• Authorized-signer list and whether the bank requires dual authorization, at what amount if any.
• Whether you will receive bank or trust statements during the exchange.
• Current fidelity and E&O certificates, or the statutory cash/LOC/escrow alternative the firm is using, if a state statute applies. Do not accept a brochure number. The QI File does not invent limits.

Related

• How to choose a QI
• Forward vs reverse vs improvement
• State bonding and registration
• QI custody vs DST offerings
• How to read a listing
• Firm directory