A Primer on a Community Property Agreement
When spouses are married in a community property state like Washington, the laws controlling what happens if one spouse dies generally treat all property acquired during the marriage as trapped. That means when one spouse dies, his or her property is divided between the surviving spouse and the deceased spouse’s heirs even if the property was just acquired a week earlier. This leads to some awful results, such as having to sell a home to pay debts, debts being paid from community property that the surviving spouse needs to live, etc.
A community property agreement is a simple legal strategy spouses can use to avoid the pitfalls of the community property system that can be devastating . Simply put a community property agreement is a contract between spouses that says, "If one of us dies, the other keeps everything." This seems naive until one looks into Washington law as an example. A community property agreement will automatically grant a surviving spouse ownership of community property already owned by the spouses at the time of the community property agreement and anything acquired under Washington law after that point. A community property agreement does not give the survivor the right to decide who gets what if removed from the vicinity (sold, damaged, destroyed).
For spouses legally married in Washington State who want the community property option but want to avoid its problems, a community property agreement is a good choice.
Hallmarks of Washington Community Property Agreements
Typically, Washington Community Property Agreements ("CPAs") have certain key features. Importantly, a CPA must list all of the property to be transferred upon the death of the first spouse. "List" may be defined as both specifically naming the items or using generality, if each spouse was to prepare a Will containing a comprehensive "pour over" provision. Something as simple as: "All property owned at the time of either party’s death, whether community, separate or otherwise." It may be even simpler: "Any other property that is covered by this agreement." However, a CPA prepared for a "poured over" Will should not contain assets not listed in the Will. Furthermore, each spouse can only transfer property owned by the "decedent" — property which is already in that person’s sole name. In other words, a spouse cannot transfer property he or she must share with the other spouse.
Often, CPAs contain clauses appointing the surviving spouse as the Personal Representative of the deceased spouse’s estate. In so doing, the surviving spouse’s idea is that the CPA accomplishes both the transfer of community property and the appointment of the surviving spouse.
In addition to the typical provisions, CPAs may contain other clauses for the purpose of accomplishing specific goals. For example, a spouse or both spouses might desire that specific accounts, including bank, brokerage, and retirement, be transferred to the surviving spouse. In such a case, under Earnest Wentworth’s and my terminology, such a bequest is known as a "Special Bequest." Special Bequests should always refer to the separate accounts; i.e., the accounts must be known as: Joint account, $XXX X’s account, $YYY (including her retirement account). Y’s account, $ZZZ (including his retirement account).
A retirement account can also be a special bequest. This would be a retirement account that should be owned as separate property.
Conversely, if a spouse wants the estate to include all accounts, then the following would be the desired term: The same as above but adding the term INCLUDIBLE. Z. All accounts, including all husband’s and wife’s retirement accounts.
Another example of a Special Bequest (which is the CPA term) is a business. A spouse may want his half of the business valued, with the expectation that upon the death of the other spouse that spouse may purchase it. Another example is real estate. One spouse may expect the property to be purchased by the surviving spouse, with the spouses splitting the value. Finally, a spouse may have special personal property items to be transferred upon the death of the first spouse.
Advantages of a Community Property Agreement
For couples residing in Washington, executing a community property agreement is a smart way to assist in the distribution of separate property at death. By proper execution of the community property agreement, residence property acquired after marriage in Washington will be deemed as community property and thus receive a significant income tax benefit upon the death of the first spouse. Washington officers and administrators should recognize that there is no automatic right afforded to a spouse of Washington resident. A community property agreement allows for the agreement of the spouses to treat all of their property as community property, which can then be distributed to the survivor at the death of the first spouse. A community property agreement will avoid the need for probate and court supervision altogether and will allow for management of the property by contract, rather than by trust law. The result is added savings for the survivors and is considered to be almost always a beneficial form of estate planning to spouses.
Common Pitfalls
In addition to the lack of flexibility, we see that there is potential for misunderstanding and/or further disputes with community property agreements. These agreements are set forth in a separate document from the Will, so there is a potential issue if there is a will that is inconsistent with the community property agreement. The operative language is that the spouse’s "share" of community property passes to the other spouse if the person who signs the community property agreement later dies. If a different devise of that spouse’s "share" (which is presumably half) is set forth in the will, the two can conflict. It is not always clear what is a "share" of the community property. Does an interest in real property constitute a "share"? Does a bank account or other personal property item constitute a "share"? Does any cash value of a life insurance policy constitute a "share"?
What if there is later a dispute over whether a particular devise is in fact inconsistent with the community property agreement? There is a further potential dispute if one person can seek to halt or delay the distribution of the entire estate to determine, as between the two people who signed the community property agreement and who are inheriting everything, what constitutes the "share" of a particular item of property. Finally, as with all deathbed instruments, signing a community property agreement could potentially lead to contested issues concerning capacity and undue influence. A "normal" will usually does not need to be signed in front of a notary. It will only need to be witnessed by two witnesses and notarization is only utilized to authenticate the signatures. However, if it is signed by the spouse on their deathbed (as with any will), the witness and notary might be called to testify that the signatures in fact came from the person who passed away.
How to Develop Your Community Property Agreement
If a couple wishes to establish a Washington State Community Property Agreement (CPA), the parties should first consult with a knowledgeable CPA lawyer about the legal requirements and ramifications of forming a CPA. While normally a CPA enables a couple to avoid the cost and delay of a probate proceeding, the drafting of the CPA must comply with the formalities of a will (with exceptions), and the drafting process should be conducted with the same care and attention to detail as that of a will. In addition to any other required formalities (such as witness signatures, etc.) the CPA must be dated and signed by both spouses. Failure to comply with the statutory requirements for a CPA may render the CPA ineffective.
Unlike both wills and revocable trusts, CPAs can be established in any manner by the jointly expressed intent of the parties. However, the parties are urged to use a written CPA in order to satisfy the statutory requirements for a CPA. If possible, the parties should seek the advice of a lawyer familiar with CPAs and , if using forms, they should modify them as needed for their situation. However, a well-drafted and executed CPA supersedes a potentially flawed CPA, no matter how well-meaning the lawyers were who prepared them.
After receiving competent legal advice about CPAs, a couple should review the terms of the CPA, jointly agree on what terms they want to incorporate into the CPA, and create the CPA. If the wife is pregnant at that time, she and her husband may elect to suggest that the CPA take effect now but incorporate a provision that it not take effect until the birth of the child and then only if they are still married. At the time they create and execute the CPA, both parties disclaim any interest in any property (whether real or personal) to be acquired by the couple during their marriage, thereby averting the need to list all of the property the couple owns and will own during the marriage.
Typically, a newly created CPA will contain some or all of the following provisions:
Legal Aspects
Legal considerations and requirements specific to Washington must be adhered to when forming a WA State Community Property Agreement. Formal documentation: All couples forming these agreements must comply with certain formalities in the formation of the agreement. Washington state courts typically require that any spouse proposing to enter into a community property agreement submit it in writing. Furthermore, Washington state courts require that the community property agreement be signed by both spouses, in front of a witness, and the witness also sign the document. Legal counsel: Most lawyers in Washington handling estate planning issues will recommend that each spouse obtain independent legal counsel prior to execution of a community property agreement. This separation of interests is generally advisable to avoid the possibility of a later claim of undue influence by one spouse over the other. If one spouse did not understand the economic impact of the agreement because she or he did not have their own independent legal counsel, a challenge to the agreement could be successful.
Avoiding Common Errors
Common mistakes made when entering into a WA State Community Property Agreement include the following: Each situation is unique, but generally speaking a valid community property agreement will contain the signatures of both parties with documentation from a notary public. This may seem straightforward, but failure to properly identify the witnesses and have them sign the agreement can lead to the agreement being void. Good lawyers will make sure that their clients understand the legal meaning of terms and the potential consequences of the property agreement. Having your attorney review all terms with you and explain everything in detail is crucial to ensure that there is no room for misinterpretation. Clients often focus on the distribution of property when they need to also consider liability. Imagine that your spouse runs up a staggering amount of credit card debt due to gambling, and your property agreement states that all debt will be distributed evenly between you both. In a community property state like Washington, if you sign the agreement and then decide to divorce, you could suddenly be held responsible for half of your spouse’s debt, even if your spouse accrued the debt before you were married. Even seemingly good agreements could have unintended consequences. A good lawyer will go through the entire agreement with you to ensure that you are covered and will not face issues due to a legal loophole or poorly written language in the agreement. Even experieinced property attorneys sometimes forget to continue researching problems to ensure that they make the correct decision on behalf of their client. It is always a good idea to follow up with a property lawyer and ensure that all legal ramifications have been understood prior to signing the community property agreement.
FAQs
Frequently Asked Questions about WA State Community Property Agreements
For additional information on Community Property Agreements in Washington State, please visit the following webpages written by leading family law attorneys:
The following questions are frequently addressed in their respective pages:
What is a community property agreement?
A community property agreement in Washington State is a specific kind of pre-evaluation (or postnuptial) marital agreement used to address the classification and disposition of the couple’s property as part of the process of terminating or dissolving the marriage. Unlike typical property settlement agreements, however, a community property agreement does not have to be a contract supported by consideration.
What is community property?
As defined under Washington State law, community property generally includes all property acquired by personal effort during the marriage unless it was:
What is separate property?
Separate property includes property that was acquired before the marriage or property acquired during the marriage as a gift or an inheritance . A couple’s separate property does not become joint or community property simply because they marry or move to a community property state.
How much is the community property taxed at death?
Because a community property agreement automatically converts jointly held personal and real property into separate property at the death of the first spouse to die, the survivor receives a "double step-up" to fair market value at the date of both spouse’s deaths; hence, there is only one-half of the assets taxable to income and only one-half of the gain.
How is beneficiary designations handled in a community property agreement?
Careful estate planners normally recommend that beneficiaries be designated for assets passing outside of the community property agreement. That way, personal representative(s) can pay expenses and death taxes from the community assets at the death of the first spouse.
I have more questions, where can I get answers?
Consult with a Washington State community property agreement attorney.