Should I Have a Community Property Agreement?
Washington law permits spouses to make agreements concerning the character of their assets. Community property may be changed to separate property. Separate property may be changed to community property. RCW 26.16.120.
Community property agreements change the character of all of either marital partner’s assets to community property. If a partner possessed separate property, after signing the community property agreement, that separate property becomes the property of the marital community.
For estate planning purposes, a community property agreement makes it likely that all property of the first-spouse-to-die can be transferred to the surviving spouse without a probate. This ease of transfer could relieve the surviving spouse of the responsibility of administering probate of the first-to-die-spouse’s estate, which relief may be welcome in the midst of the grief that accompanies loss of a spouse.
The estate planning community property agreement, however, also has some downside implications and possibilities.
First, by transferring the community assets from one spouse to the other without probate, the surviving spouse fails to take advantage of the short probate creditor claim statute of limitations. Some matters on written contracts of the deceased spouse may emerge, where a community property agreement has been utilized and no probate administered, six years after the deceased spouse’s passing. If probated, those creditor claims would be cut off after a mere four months.
Second, the estate planning community property agreement creates a trap for the unwary. Community property is subject to different presumptions than separate property when being divided between spouses by divorce courts. Courts generally presume that, absent equitable considerations to the contrary, the separate property of divorcing partners should remain with the owner, while the court presumes that community property should be divided equally between the marital partners upon divorce. RCW 26.09.080, and its interpretive cases. When divorce comes upon a partner unawares (as is often the case for one of the marital partners), a community property agreement, executed for savings of the expense of probate proceedings, can result in the unwanted transfer of substantial assets to the divorcing spouse, assets which would have, absent the community property agreement, have remained with the separate property owner.
Third, a community property agreement may create unintended disinheritance. A community property agreement takes precedence over an inconsistent Will dated before the community property agreement. Estate of Lyman, 7 Wash. App. 945, 503 P.2d 1127 (1972), affirmed, 82 Wn.2d 693, 512 P.2d 1093 (1973). If a person’s Will contains a gift of that spouse’s half of community property to some person other than the testator’s spouse, that gift will be defeated by a community property agreement.
Fourth, one spouse cannot, without the consent of the other spouse, terminate a community property agreement.
Fifth, changing the character of separate property to community property may make the newly-characterized property subject to debts of the other spouse, where previously the property had been immune to those claims.
Sixth, even with a community property agreement, one needs a Will to nominate personal representatives, guardians for minor children, and to deviate from Washington statutory standards (for example, in granting non-intervention, non-bond status to personal representative).
Seventh, by passing all property directly to the surviving spouse, the marital couple may lose the opportunity to do estate planning to utilize the estate tax unified credit, which credit may be extinguished by operation of the community property agreement.
Eighth, a community property agreement may be ineffective for transferring real estate located in other states, especially if those states are not community property states. If ineffective, one must conduct an ancillary probate in the state where the real property is located.
I do not advise my clients to execute a community property agreement. I tend to advise them to revoke their community property agreement when I find my clients have executed one, though this rule is not one to which I always adhere.