Why do I need a Community Property Agreement when I live in a Community Property State?

sampleUnder Washington law, all property acquired by either spouse during their marriage is presumed to be community property.  Property owned by a spouse prior to marriage or acquired during marriage by gift, inheritance or devise will be considered separate property.  Property acquired during marriage while you live in a non-community property state might also be considered separate property.  While the law describes the ownership of the asset owned, it does not say who the owner wants to be the beneficiary of their interest in the property when the owner dies.  So, if it is the desire of both spouses that the survivor is to become the owner of all of the interest in the property they own, both real and personal, it is beneficial for them both to sign a contract which puts this plan in place.  This contract is called a community property agreement.

The effect of most community property agreements will be to convert all property obtained or owned by a deceased spouse, regardless of its character, into community property.  As a result, all property owned at the time of the death by the first spouse (usually an undivided one-half of the whole in the community property, plus any additional separate property owned only by the deceased spouse) will become community property, and will automatically pass to the surviving spouse by operation of the Community Property Agreement.  There will be no probate, nor any need for a living trust to effect this transfer.

Community property agreements can do all or some of the following:  They can act to convert property owned at the time of execution into community property, convert after acquired property into community property upon receipt (regardless of the character of the property when acquired, ie: separate or community), and convey it all to a surviving spouse at death.  There are significant differences in the effect of each.

Community property agreements were very popular when they first came into existence, and people purchased them at local stationery stores and executed them without regard to the consequences.  We have spent many hours undoing the effects of a community property agreement in a situation where one spouse has become disabled, and they can be deadly in divorce proceedings if they convert separate inherited property to community property, which some do, much to the shock and/or delight of the parties. 

Some community property agreements operate to make anything obtained by either spouse a community asset.  Consider a situation where one spouse has become disabled and the assets have been transferred to the name of the well spouse to obtain Medicaid benefits.  Any asset subsequently acquired by the well spouse will be converted to community property, and may thus act to disqualify the disabled spouse from medical assistance or reduce the eventual inheritance of the heirs.  Additionally, if the non-disabled spouse of an individual qualified for state or federal assistance dies without canceling their community property agreement, the assets transferred from the disabled person previously will be returned by operation of this agreement, resulting in disqualification.

Unfortunately, in the case of disability, you generally have very little warning and, if you have a community property agreement which you and your spouse signed years ago, that document could end up being a very costly problem.  To avoid this risk, we typically do not record the original, and we grant the spouse and agent named prior in a power of attorney to cancel the community property agreement in the event of disability.  Without these protections however, a recorded community property agreement may turn a non-remarkable asset transfer to obtain needed long term care help into a major procedure in the event of disability.

 Additionally, there are certain advantages to going through the probate of a Will or using a good living trust which do not exist in the case of a transfer by means of a community property agreement, significantly the tax savings and non-claim period provided by statute.  While we consider community property agreements to be a valuable estate planning tool in small estates, we rarely recommend their use for large estates, and would urge you to consult with your attorney before one is executed.  If you have executed one in years past, you should consult with your attorney concerning the effect of that document with respect to disability planning.

For Washington residents owning property in Idaho, such an agreement can avoid an "ancillary" or Idaho probate, provided they are drafted and filed in strict accordance with Idaho law.  This can save a family significant funds by avoiding the necessity of two probates.

One final note, if you are an Idaho resident, or you are filing to permit Idaho property to pass to your spouse without an Idaho probate, you must record your Community Property Agreement in Idaho prior to death if it is to be effective.

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