Community Property Agreements and Estate Planning

Questions about community property often arise during the estate planning process. In order for lawyers to help you meet your estate planning goals, we need to understand what type of community property you own as compared to the property you own separately. Depending on your circumstances, the lawyer may recommend the use of a Community Property Agreement.

Washington is one of nine states that have a mandatory community property system. In a community property state such as Washington, all property acquired by either spouse during their marriage (or by a domestic partner in a domestic partnership) is presumed to be community property. In addition, a spouse or domestic partner can agree to create community property, and separate property can be converted into community property by commingling.

Contrasted with community property is “separate property,” which is property owned prior to marriage or property acquired during the marriage by gift or inheritance. Property acquired during marriage while you live in a non-community property state might also be considered separate property. Other types of separate property include certain damages from a personal injury award and earnings and income on separate property. Finally, property acquired during marriage in a non-community property state might also be considered separate property, as well as property that the spouses agree, is separate property.

Community property is owned equally on an undivided basis by both spouses. Each spouse has an equal ownership basis in the community property, and has equal rights to manage the community property.

Why is it important to understand what property is owned by a spouse as community or separate property? Upon the death of the first spouse, any property owned as community property (real estate and personal property) automatically passes to the other spouse. Additionally, without a will, a portion of separate property may not pass to the surviving spouse. In both of these scenarios, the manner that property passes to the surviving spouse (or doesn’t pass) may not match up with estate planning goals and intent of the parties.

While Washington law may describe the ownership of an asset, it does not specify who the owner of the asset wants to be the beneficiary of their interest in the property when the owner dies.  If both spouses want the surviving spouse to become the owner of all interest in the real and personal property they own, then it is important for them to consider signing a contract, called a Community Property Agreement, that converts all of their property (including separate property) into community property.

After the first spouse dies, the Community Property Agreement will cause all of the property owned by the couple to automatically pass to the surviving spouse without the need for probate or a living trust.

Care must be taken to ensure that a Community Property Agreement is the right instrument to achieve estate planning goals. For example, a Community Property Agreement that converts separate inherited property into community property will cause significant issues in the event of a divorce, where the spouse that received the separate inherited property stands to lose due to the conversion into community property. Additionally, in the event that one spouse becomes disabled and assets have been transferred to the healthy spouse in order to obtain Medicaid benefits, a Community Property Agreement will disqualify the disabled spouse from receiving assistance (unless it is canceled).

Community Property Agreements may not be appropriated in certain taxable estates or in estates where the probate process may be helpful to deal with creditor claims.

You should consult with an experienced estate planning lawyer with your questions concerning the effect of a Community Property Agreement that may have been previously signed, as well as whether it would be an appropriate tool with regard to your estate planning goals and intentions.