Understanding Washington’s Community Property Agreements

What is a Community Property Agreement?

What is a Community Property Agreement in Washington?
A Community Property Agreement is a post-nuptial contract; under a community property agreement, each spouse’s assets become community property. A Community Property Agreement serves two main purposes: First, to change the character of property from separate to community property. Second, to shelter the widow or widower from estate taxes if the other spouse dies first. If the surviving spouse files an estate tax return, the personal representative can elect to deduct the community property, and in the case of community property that is transferred by will , the surviving spouse will be able to claim the property as a marital share under RCW 11.04.250.
The surviving spouse will receive the income generated by the community property and the property will pass to both spouses’ estates at death. In Washington State, Community Property Agreements can be drafted to avoid the unnecessary and duplicative expense of probate if one spouse dies first; however, a Community Property Agreement does not avoid probate with respect to a surviving spouse’s assets, such as inheritances or personal gifts. Under Washington’s community property law, your separate property (including premarital assets, inheritances and gifts) will pass according to the terms of your will or, if you do not have a will, Washington Statutes In the absence of a will, a person’s estate passes to his or her children under Washington Statutes….

Major Aspects of Washington Community Property Law

The Washington Community Property Agreement codified in Chapter 26.16 RCW governs certain aspects of the property acquired by spouses during their marriage, the disposition of such property in the event of a divorce and/or dissolution of marriage (or death) and the rights of absent or incompetent spouses. The main feature of Washington’s community property laws is that property acquired during the marriage is presumed to be community property. In addition, all debts incurred during the marriage are presumed to be community debt. The presumption may be rebutted if there is any proof that the property or debt belonged to one spouse before the marriage or was gifted or inherited during the marriage to one spouse. This community property presumption means that when spouses divorce, half of the community property (and in fact, probably half of all property held by either or both spouses) should be divided between them unless there is an agreement reached that provides otherwise. In dissolution actions, assets can be categorized into separate and community property/personal and marital property and divided. Separate property is property owned by a spouse prior to the marriage, or property given as a gift or inheritance to a single spouse after the marriage began. Separate property acquired after marriage must have been acquired under special circumstances. Usually if the parties have a community property agreement, any property acquired may be identified as community property.

Advantages of a Community Property Agreement

A Community Property Agreement in Washington is quite beneficial. The first benefit is asset protection. After the death of 1 spouse the property is no longer available to the estate of the deceased through probate. This will ensure that all assets will stay with the surviving spouse and his/her inheritance without being tainted by claims of credits and liabilities of the deceased’s estate.
Secondly, the Community Property Agreement has the effect of combining the assets of the spouses and terminating their community interest in almost all of the properties. Accordingly, the estate of the surviving spouse (in Washington) can avoid not only the costs of probate, but also the time and delay of the process.
Furthermore, the Community Property Agreement is advantageous because it does not trigger any gift tax. The amount of tax liability created by gifts during life is equal to the gift amount.

Drawbacks to Consider and Points to Note

There are some potential drawbacks and pitfalls to entering into a community property agreement that should be understood before deciding to take this step. Washington community property agreements can have differing effects on a person’s financial and legal interests when compared with a prenuptial or post-nuptial agreement, and thus it is important to understand these distinctions before entering into a community property agreement.
Unlike other marital agreements, a community property agreement has no contingency or condition for its effectiveness (other than the execution itself). In other words, once a community property agreement is executed by both spouses, all property of the spouses will be deemed community property at death, regardless of the consequences of that characterization in light of other estate planning documents. This not only has implications for the estate of the decedent spouse, but also has potential implications for estate planning with respect to the surviving spouse.
Further, the estate of the deceased spouse is left open to challenge and disposition under the community property agreement regardless of the terms of the deceased spouse’s Will. In Washington, however, a surviving spouse may only challenge the decedent’s Will on very limited grounds (fraud, undue influence, etc.) and, unless the surviving spouse has acted to revoke the Will, it is presumed valid by the Court and therefore unassailable in most instances. A community property agreement, by contrast, can be challenged in its entirety. A community property agreement also may dispose of property without regard to lawful restrictions on testamentary gifts.
Another consideration is that, although the community property agreement will subject the decedent spouse’s one-half share of the community property to administration by the personal representative for debts and costs of administration and according to the Will’s scheme of distribution and for satisfaction of certain widow’s rights, a community property agreement does not impose any such discipline on the surviving spouse’s interest in the community property.

How to Prepare a Community Property Agreement

Generally a valid community property agreement:

• (1) must be in writing, signed by both spouses, and make the express declaration that the property owned by them or acquired by them thereafter is community property;
• (2) must identify the specific property that is the subject of the agreement; and
• (3) must be executed voluntarily, with full disclosure of the property involved and of its value, and accompanied by consideration, such as the marriage itself.

Additionally, the agreement must be set forth in a separate document from any other agreements of the spouses unless it, "in express terms," refers specifically to the separate claims of property of each spouse. In other words, any existing separate property and other contracts or agreements that could also redistribute the property without the other spouse’s knowledge should be segregated for express disclosure to be valid.
Without compliance with these requirements, the agreement is invalid as to creditors of the spouses , and would constitute a fraudulent conveyance that could have the result of not only allowing the creditor to take the property against the other spouse’s interest, but also attach some of the property as belonging to the debtor spouse solely without protection that the community property laws would otherwise provide.
The most significant aspect of drafting a valid agreement is the first requirement. Because full disclosure is required, the parties should consider a professional appraisal or appraisal with market analysis to document the valuation. Once this is done, the agreement can be drafted with legal advice to protect each spouse’s rights. For example, an agreement drafted without adequate legal advice could include property that may not be properly classified as "community" property. Alternatives for controlling how property is disposed of after death exist, but legal assistance will help select the most cost efficient and practical alternative to suit the situation.

Common Situations and Case Examples

Over the years we have utilized community property agreements for many clients. The most common scenarios include:
Death Without Children, No Previous Marriage
Community property agreements are often a "no brainer" for planning married couples with no children and no previous marriages. You can execute a community property agreement knowing that community property, including all separate property acquired during the marriage, will pass to the surviving spouse. You are insuring that the second spouse’s death will not cause a problem with the IRS and that the surviving spouse will have full and complete ownership over community property. However, a community property agreement will not work for married couples with children. In those scenarios a disclaimer trust (or other estate planning document) is needed.
Death with Only One Child
Another scenario where a community property agreement may work is where there is only one child. If one spouse dies and leaves everything to the child, then the surviving spouse cannot receive any of the community property on the death of the first spouse because the community property automatically belongs to the surviving spouse as a result of the community property agreement on the death of a spouse.
Death with Multiple Children
On the other hand, if both spouses die and leave their assets to their children by a previous marriage, the assets of the spouses may be subject to double estate tax from both the deceased spouses (or surviving spouse if there is no will). For this reason, a community property agreement would not be appropriate in these situations. Instead, classic estate planning will work better as a means to reduce estate tax for the children and surviving spouse.

Legal Support and Guidance

Navigating the complexities of community property agreements requires a solid understanding of the law as well as careful planning. Seeking the assistance of legal professionals is essential in ensuring that your agreement is tailored to meet the needs and long-term goals of you and your spouse.
Your first stop should be the State Bar of Washington, which can direct you to a variety of legal resources. The Washington State Law Library can be an excellent source, as well. This organization provides an array of legal research tools and services designed to support your investigation into important matters like community property agreements.
Family law courts also provide many resources for individuals who have legal questions or need assistance with alternative legal arrangements, mediators, arbitration, and other ways to resolve issues without the time and expense of a court hearing . These courts can be invaluable in helping you and your spouse to prepare and understand your agreement, as well as how to address any future problems that may arise outside the realm of community property agreements.
Another extremely useful resource for you and your spouse is the Washington State Office of the Attorney General, which can provide you with an overview of many important legal concepts, such as spousal and child support, divorce and separation, bankruptcy, housing issues, and more. There are also legal portals that allow you to ask a question regarding Washington law and receive prompt, anonymous feedback.
Regardless of the legal resources available to you, it is always advisable to enlist the help of an experienced family law attorney before entering into any legal arrangements such as community property agreements. A qualified lawyer who focuses on alternative legal arrangements will provide the most comprehensive insight into your options, requirements, and potential challenges.