As one year comes to an end and another begins, it’s worth taking stock of your estate plan and ponder whether Washington State’s Community Property Agreement is right for you. In all the complexity of the estate plan, the Community Property Agreement is one document in particular that offers simplicity and yet is still a powerful component to an estate plan. It can be drafted on a single page and contain fewer words than this article. And, it provides (in this author’s opinion) the simplest, most cost effective, and most powerful method to transfer assets between spouses at death.
“But, Washington is a community property state, so why do I need a Community Property Agreement?” Great question.
The fact that Washington is a “community property state” carries with it a specific meaning. It means generally that all property acquired during marriage is community property in character and owned one-half by each spouse. All property acquired before marriage or during marriage by gift or inheritance maintains its character as “separate property” (i.e., not community property). This is all that it means when we say colloquially that Washington is a community property state. It’s a statement as to the character of the property acquired by a married couple. It does not mean that the surviving spouse has an interest in all the property and it does not mean that the surviving spouse is automatically entitled to the property at the death of the first spouse and it does not mean that the property vests in the surviving spouse automatically. The law requires something more to accomplish all this.
The concept of community property comes from Spanish civil law and is relatively unique in the United States. Just nine of the 50 states are so-called “community property states.” And, most of those states are located in the western United States where the law was established likely for a couple reasons. First, it was likely an enticement for the female population to relocate to those states (lured by joint ownership of assets). Second, it was likely established out west because those states that included community property concepts in their constitutions adopted their constitutions later than eastern states and during a time that women’s rights were advancing nationally.
The Community Property Agreement is an agreement between spouses that they enter into concerning the character and disposition of community property. It is specifically authorized under Washington law and codified under RCW 26.16.120. It typically adds two important prongs to the general community property law outlined above. First, it provides that the parties (the spouses) agree that all property acquired at any time be treated as community property. Even though a portion of a couple’s property may have been acquired before marriage or by gift or inheritance and therefore not technically community property, the couple is agreeing that it shall nonetheless become community property in character. So, the first prong changes all property, whether separate or community, into community property. The second prong says that at the death of the first spouse, all community property shall automatically vest in the surviving spouse.
The Community Property Agreement provides the means to accomplish what most people understand the basic community property laws provide: the vesting of all property in the surviving spouse upon death.
The Community Property Agreement is not right for everyone, however. It does not work well for couples that have an estate subject to the estate tax (for 2017, those are estates valued at greater than $2.129 million for purposes of the Washington state estate tax and $5.49 million for purposes of the federal estate tax). It also doesn’t work well if the couple is planning on implementing specific creditor protection strategies in the estate plan. And, because it necessarily gives all assets to the surviving spouse, it doesn’t work where the plan is to not give all assets to the surviving spouse. For example, where a person has specific gifts outlined to children or where the couple has a blended family (think second marriage with “his,” “hers,” and “ours”) and wishes to preserve the interests of the biological children in their inheritance, then the Community Property Agreement may not work best. But for the average couple that simply wants all assets to go the survivor, the Community Property Agreement is could be appropriate.
Of course, it is always best to seek the advice of a skilled estate planning attorney to figure what works best with your unique set of facts. But don’t feel put off by the complexity of the estate planning documents or the estate planning process. It is important to have the estate plan in place and it need not be an arduous process, especially if the Community Property Agreement is included.
Who knew some aspects of estate planning could be so simple?
* Licensed, not practicing.
The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendations for any individual or entity. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through Cornerstone Wealth Strategies, Inc., a registered investment advisor and separate entity from LPL Financial.