Bank Accounts and Cash Equivalents - How to Value and How to Divide

A bank account or cash equivalent is a financial asset that provides liquidity and ease of access to funds. It includes various types of accounts offered by financial institutions, such as checking accounts, savings accounts, money market accounts, and certificates of deposit (CDs). These accounts are considered cash equivalents because they can be quickly converted into cash without significant risk of loss in value, making them highly liquid and suitable for meeting short-term financial needs.

Key Features

Bank accounts and cash equivalents are fundamental components of your financial picture and they play a crucial role in property division during divorce. Here are some of the key features of bank accounts and cash equivalents:

• Liquidity: Bank accounts and cash equivalents offer high liquidity, allowing individuals to access funds easily and quickly whenever needed.
• Safety: Funds held in bank accounts are typically insured by the Federal Deposit Insurance Corporation (FDIC) or similar regulatory bodies, providing protection against loss in the event of bank failure, up to certain limits. So there is little risk of these assets losing value.
• Interest Earnings: Some types of bank accounts, such as savings accounts and CDs, may earn interest on deposited funds, although interest rates may vary based on market conditions and account terms.
• Accessibility: Bank accounts and cash equivalents offer convenience and accessibility through various channels, including physical branches, ATMs, online banking, and mobile banking apps.
• Stability: While the value of other investments may fluctuate over time, bank accounts and cash equivalents provide stability and preservation of capital, making them suitable for short-term savings and emergency funds.

Most Common Types

These are the most common types of banks accounts and cash equivalents:

• Checking Accounts: Bank accounts that are typically used for everyday transactions, such as paying bills, making purchases, and withdrawing cash. Checking account balances often fluctuate throughout a month receiving income from employment and then spending throughout the month for regular expenses.  Some people call the checking account used primarily for income and expenses an “operating account.” An "operating account" is also commonly the term used for a business's checking account where cash moves in and out often to operate a business.
• Savings Accounts: Bank accounts intended for storing funds for future needs, emergencies, or specific financial goals, often earning interest on the balance.
• Money Market Accounts: Bank accounts that are similar to savings accounts but may offer higher interest rates and additional features, such as check-writing privileges and limited debit card access.
• Certificates of Deposit (CDs): Time deposits usually held in banks or other financial institutions with fixed terms and interest rates, typically offering higher yields than regular savings accounts in exchange for locking in funds for a specified period. From 6 months to a few years, CDs tie up your cash funds for a period of time with a guaranteed interest rate (often higher than other savings accounts). These assets may be less available to you in the short term depending on the timing of the asset.
• Health Savings Accounts (HSAs): Specialized savings accounts designed to help individuals cover qualified medical expenses while enjoying tax benefits.

First: Gather the Facts

When working through bank accounts and cash equivalents in a divorce, the first step is to identify the accounts, ownership and value. Determining the value of these accounts is relatively straightforward, as their balances are readily accessible. However, fluctuations in interest rates and market conditions may impact their overall value. Looking at statements or online values should provide the needed information for these types of accounts. However much is in the account is the value to be addressed in the divorce. You should save statements showing recent valuations for when/if documentation is needed.

Second: Understand the Law

Bank accounts and cash equivalents may be held jointly or individually.  How the accounts are titled may impact the way the law looks at their division in divorce.  In an equitable state, the titling of a bank account or cash equivalent may not matter, its more about how the account was funded.  If the funds were earned/saved during the marriage and not from a gift or inheritance, the account is likely marital. In a community property state, joint accounts are typically subject to equal division, while individual accounts may be considered separate property.

Keep in mind that bank account balances may fluctuate during the divorce process. As you earn income and spend in ordinary manners during the divorce, bank account balances often go up and down. It is important to consider this in the division and you may want to update balances closer to the actual division to account for this. Or, if you are dividing an account equally between you, then consider the timing of the division. It may make sense to divide an account in half at an agreed-upon time when both of you have been paid and shared expenses have been paid.

Commingled Funds and Tracing

In cases where separate funds are commingled with funds earned during the marriage, the process of tracing becomes essential. Tracing involves identifying and segregating separate property contributions to determine each party's rightful share.  The process of tracing may require detailed documentation of the source of funds and how the account has been used and funds spent throughout the marriage. In certain circumstances, such as accounts held in trust or accounts with complex ownership structures, you may require specialized expertise for accurate valuation and division.  Consideration of debts and liabilities associated with bank accounts is crucial in property division. Outstanding loans, overdrafts, or other liabilities should be accounted for and offset against the account balances as described in more detail in the module on debts.

Bank accounts and cash equivalents may represent a couple's financial stability and security, making their division emotionally charged. Open communication and cooperation can facilitate smoother negotiations and agreements. In navigating bank accounts and cash equivalents in divorce, attention to detail, accurate valuation, and understanding of the legal guidelines may help you reach resolution.