Savvy Seattle Women

This is the first in a series of articles written and provided courtesy of Savvy Seattle Women Board member, and local attorney, Sharon E. Best.

Do you need a Community Property Agreement?

Maybe, maybe not.  If you’re not married or you are not a registered domestic partner, you absolutely don’t need one since it only applies to married people or registered domestic partners.  Most married couples I see think they don’t need a Community Property Agreement because they live in Washington, a community property state.   However, they don’t really know what a community property agreement does.  A normal community property agreement is a binding contract between both spouses agreeing that each will convert all their separate property to community property and all of their property will go to the last living spouse upon the death of the first spouse.   Most people mistakenly believe a surviving spouse automatically inherits all that the other spouse owned.  This is not true.

The reality, for estate planning purposes, is that each spouse owns their own separate property and 50% of their combined community property.  Community property is loosely defined as everything earned by both spouses during their marriage.  Without a community property agreement, each spouse can make a Will giving his/her separate property and his/her 50% interest in community property to any person (boy friend, girl friend, charity, children, etc).  It is quite common for spouses with children from earlier marriages to want to give their children some of their assets.  They can give all their separate property and 50% of their community property to their children at their death, if they want to.   Or, they can create a trust in their will to give their separate and/or community property to a trust for the benefit of their spouse while the spouse is living, then the trust would be distributed to their children after their spouse’s death.  So, you can see that just because property is community property does not mean it must be given to a surviving spouse on the first spouse’s death.

Most people who do not have children from different relationships give their spouses all their assets in their Wills.  A community property agreement would do the same thing WITHOUT THE NEED TO GO THROUGH PROBATE.  Simply recording the community property agreement, together with a death certificate, will change title to all assets into the name of the surviving spouse with no further effort or requirement for probate.   There are a few more things that would be wise for a survivor to do even if there is no probate, such as getting date of death valuations of real property and stocks.  This is to prove the value of these items for a revised determination of tax basis for capital gains purposes.

There are some dangers associated with community property agreements and many experienced estate planners do not recommend them.  This is because they fear that an earlier executed community property agreement could wreck more complicated later estate planning documents designed to limit estate taxes.  This fear may be quite valid for high end estates and a community property agreement is probably not appropriate if you own a lot of assets.  It is also probably not appropriate when there are children in a blended marriage.

Stay tuned to this column for a discussion of estate taxes. If you do execute a community property agreement early in your marriage when you are a normal struggling working couple and then become a wealthy non-working couple, or even a wealthy working couple, be sure to tell your estate planning attorney that you have a preexisting community property agreement so that they can consider revoking it while doing your estate planning.

Remember that a community property agreement is a contract that cannot normally be revoked by either spouse by themselves.  This agreement will supersede a Will, whether the Will is done before or after the agreement.  A carefully drafted agreement will contain clauses that provide that the agreement becomes null and void if either party files for a divorce and it will provide for unilateral revocation if one spouse becomes incompetent and Medicaid planning is necessary.  So, I don’t recommend the variety of community property agreement that you may find in an office supply store or on line.  See your Estate Planning Attorney for a thorough discussion of the benefits and risks of this document as it pertains to your particular situation.

Copyright 2012 Sharon E. Best

Law Offices of Best & de Vrieze, PLLC