The trouble began in 2007. The 1031 Tax Group LLC, a privately-held qualified intermediary based in Richmond, VA, filed for bankruptcy protection. Edward H. Okun is owner and sole “member” of the company. Additionally, 16 other subsidiary firms (in San Jose, Boston, Denver, San Antonio, Tampa and New York), each designated as qualified intermediaries, also sought bankruptcy protection in the filing.

According to the initial bankruptcy filing, the 20 largest creditors were owed more than $65 million. In total, there were more than 300 open exchanges, representing approximately $151 million outstanding, at the time of the filing.

Related legal filings reveal that Okun and his affiliated entities transferred more than $100 million of customer funds entrusted to The 1031 Tax Group to another Okun affiliate. That money was originally deposited by taxpayers as part of their 1031 exchange transactions, and was to be held pending reinvestment of the funds into qualifying like-kind property. Ultimately, it was determined that Okun and his affiliates “borrowed” the funds, leaving The 1031 Tax Group with insufficient capital to satisfy customer needs.

The troubles hit rock bottom

In the fall of 2008 LandAmerica 1031 Exchange Services and its publicly-traded parent LandAmerica Financial Group, filed for bankruptcy protection. There were a total of 450 taxpayers for whom LES was holding a combined $420 million in exchange proceeds. Unlike the Tax Group case, there was no misappropriation at LES.  Rather, LES had invested approximately $290 million into auction rate securities, a speculative investment vehicle. While filings claim that the “par” value was 100 percent of the funds deposited, the market froze, rendering the investments illiquid, and leaving LES unable to satisfy customer needs. To compound matters, the Bankruptcy Court determined that the exchange funds being held by LES were part of LES’s and LFG’s bankruptcy estate, to be used to satisfy their general debts, not to be returned to the taxpayers.

While the method was different, the outcome was the same; clients lost hundreds of millions of dollars unnecessarily.

Choose a qualified intermediary that works to protect your exchange proceeds

Wilmington Trust 1031 Exchange LLC (WTEX1031) was built in response to these types of issues, offering investors a 1031 exchange service with client security at every stage of the transaction.

When a new 1031 exchange is opened, Wilmington Trust obtains a photo ID of each client. In addition to Patriot Act and OFAC reviews, this identification protects the client against identity theft. Every transaction gets a fully segregated bank account; client funds are never pooled with other clients’ funds, nor deposited into previously used accounts.  Moreover, each account is a true qualified escrow account, as compared with a traditional depository account used by most qualified intermediaries. 

To further protect the client, the exchange agreement specifically disclaims WTEX1031’s interest in the exchange funds in the unlikely event of a bankruptcy. (In the LES case, the Court ruled against the taxpayers because of draconian language in the exchange agreements, transferring full dominion and control of all exchange proceeds to LES.) 

When the taxpayer requires funds for the acquisition of replacement property, his or her written request is verified by a minimum of three people within Wilmington Trust. Verbal requests for the release of funds and requests from the taxpayer’s advisors (accountant, attorney, etc.) are not accepted absent a proper Power of Attorney.

Throughout the entire process, Wilmington Trust works to protect your 1031 exchange proceeds so you may acquire replacement property and enjoy the benefit of capital gains tax deferral.

Wilmington Trust can assist with your 1031 exchange

Wilmington Trust 1031 Exchange LLC is a nationwide provider of QI services. Our professionals have facilitated exchanges of all kinds, across the country and internationally. We will coordinate with your attorney and other professionals to ensure a smooth transaction at every step. We can help you complete both the disposition of your existing asset and the acquisition of your new one – from contract to closing.

IRC Section 1031 allows taxpayers to defer the gain on the disposition of business or investment real estate, if that real estate is replaced with like-kind real estate, within specific timeframes. Consult your tax or legal advisor for additional information on the requirements and limitations of such exchanges. Wilmington Trust 1031 Exchange LLC is a wholly owned subsidiary of Wilmington Trust, N.A. *Wilmington Trust 1031 Exchange LLC does not provide tax or legal advice to clients.