Washington is a community property state. It is one of nine (the others are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Wisconsin). Married couples who live in one of these community property states often, incorrectly, assume that everything they own is community property. That’s not always true. For example, if a spouse purchased an asset before the marriage, such as a house, that is generally considered to be that spouse’s separate property. Or, if a spouse receives an inheritance during the marriage, that is also generally considered to be separate property.
Although a full analysis of community versus separate property goes beyond the scope of this blog post, it is important for spouses to understand what a “standard” Community Property Agreement is and whether it might benefit them. In essence, a Community Property Agreement says, “What’s mine is yours, and what’s yours is mine.” It converts, generally upon the death of the first spouse, all of that spouse’s separate property over to community property, and transfers all the community property to the surviving spouse. Why would anyone want to do that?
With certain caveats, a Community Property Agreement can be a helpful estate planning tool for married couples if both spouses desire that, upon the death of either spouse, all of the assets will go to the surviving spouse. In Washington, a Community Property Agreement can assist the surviving spouse in avoiding probate. The surviving spouse can present the Community Property Agreement and a certified copy of the death certificate to various financial institutions in order to transfer accounts that are either jointly held or held just by the deceased spouse over to the surviving spouse’s sole ownership. The Community Property Agreement can also be recorded as part of transferring title to real property jointly held by the couple, or held by the deceased spouse, over to singular ownership by the surviving spouse.
However, a Community Property Agreement may not always be advisable. For example, suppose a spouse would like to retain separate assets or make a testamentary distribution to another family member? Or, suppose the couple needs to do some tax planning to minimize or avoid their estate tax liability? In that event, they will likely not want a Community Property Agreement because it simply dumps assets into the survivor’s estate without opportunity for planning. For similar reasons, a Community Property Agreement may not be a good idea if the surviving spouse desires to qualify for Medicaid.
Many Community Property Agreements, by their terms, are automatically revoked if a spouse establishes a domicile outside of Washington or if a spouse files a pleading for separation or dissolution of the marriage. You may not want to have this sort of agreement if you live in a non-community property state. And, if someone in the process of getting divorced dies, it is safe to assume that they would not want the surviving spouse to automatically receive all of their assets.
Do you have any questions about Community Property Agreements? We’d be happy to help.