What Is a Community Property Agreement?
A Community Property Agreement is a legal contract that designates the property (real estate and personal property) owned by both spouses as joint community property in Washington State. According to Washington law, all property acquired during a marriage is deemed community property ("CP"), except such property which is acquired (1) prior to marriage by one of the spouses, (2) by inheritance or gift to one spouse, or (3) as a result of the sale of a spouse’s CP if the proceeds are reinvested into separate property or if the proceeds are added to the separate estate in the name of only one spouse. RCW 26.16.030. However, by means of a Community Property Agreement, each spouse may designate a portion or all of his/her separate property as CP. Throughout the remainder of this post I will refer to the property owned by both spouses as "the CP".
In short, CP is the property acquired by both spouses during their marriage while residing in a CP State, in this case, Washington State.
The vast majority of CP states treat CP as a marital asset. This means that CP is owned undividedly by both spouses, meaning it is not subject to inheritance or other disposition at the death of either party. In the event of death, the spouse’s share of the CP is subject to probate like other community and separate property. However, a spouse can bequeath to a third party his/her half of the CP by signing a will. For this reason , spouses will often want to sign a Community Property Agreement so that such property cannot be disposed of without the consent of the surviving spouse. Without a Community Property Agreement, the surviving spouse would be entitled to fifty (50%) percent of the CP.
A couple may want to execute a Community Property Agreement in order to provide for each other in the event of death. The couple will designate all property they own (separately and jointly) as CP which passes to the surviving spouse outside of probate. This allows each spouse to avoid the necessity of a court supervised probate proceeding in order to acquire the property owned by the other. As CP, the property is owned undividedly by both spouses. Consequently, with a Community Property Agreement, the decedent cannot leave his or her CP to another person unless he or she also signed a will bequeathing his or her CP to such third party apart from the CP Agreement.
As part of the Community Property Agreement, each spouse designates that all CP should be titled as "the husband and wife." In other words, a Community Property Agreement is an agreement by the spouses to own the property as tenants in common, rather than joint tenants with rights of survivorship. In the absence of a Community Property Agreement, the title to the property does not generally have any effect on the nature of the property as CP. However, if the couple executed a Community Property Agreement and titled the property as joint tenants with right of survivorship, such property would belong to the surviving spouse free of the terms of the Community Property Agreement.
The Legal Basics in Washington State
In Washington State, community property laws are governed by Title 26 RCW, specifically Chapter 26.16 which is dedicated to the control and management of community property. More specifically, RCW 26.16.030 dictates the general rules concerning the disposition of community property. Though a spouse may not adversely affect the one-half interest of the other spouse "without their written consent," the statute allows for extensive discretionary control over the community estate, and, importantly, its rules surrounding the passing of title also apply to conveyances between the husband or wife and third parties in good faith. Moreover, RCW 26.16.020 provides limited grounds for the disposition of community property without consent of the other spouse, including the ability to reply on the other for the "just and faithful performance of the trust." In this way, the courts place an onus on the spouses to be fair and equitable with one another. The rules surrounding community property agreements themselves are governed under RCW 26.16.150 et seq. RCW 26.16.150 allows a husband and wife to "make a written agreement in the form of a joint deed, bill of sale, or similar transaction, declaring the property of either or of both to be community property…." Though RCW 26.16.160 requires that the agreement include the signatures of both spouses, it otherwise imposes no other formality on the execution of the agreement itself. In general, community property agreements are to be interpreted and enforced as any other contract (RCW 26.16.170), except in cases where they are revoked by a later agreement and where they have been deemed nullity by the courts (RCW 26.16.180).
What Does a Community Property Agreement Form Contain?
The essential components of a community property agreement form in Washington State mainly include the identification of the parties, an accurate description of the real property at hand, and a clear declaration of intention to hold the property as community property in line with RCW 26.16.030(1). The parties must be clearly identified, using both first, middle, and last names as well as their social security numbers. Also, the signatures must be notarized and properly acknowledged by a person authorized to do so by law. The description of the real property must not only discuss the address of the real property but also provide a comprehensive and detailed description of the property itself so that a reasonable person could distinguish the property from any other real property. As for the declaration, while this aspect of the form does not need to be very detailed, it should be specific enough to indicate the intention of the parties to hold the property as community property under RCW 26.16.030(1).
Pros and Cons of Community Property Agreements
In determining whether a Community Property Agreement is right for you, consider the following benefits and risks:
Benefits
Ease of distribution: A community property agreement simplifies the division of assets between spouses at death. Without it, spouses will have to determine how to divide all marital property, either by agreement, or through the court in a dissolution or probate case if they cannot agree, which can take months, if not years, resulting in litigation expenses for the parties.
Asset Protection: A community property agreement is a tool that may be used to protect business or other assets from claims in a divorce, separation or dissolution or after a death. (Whether a business or other asset would require such protection should be discussed with an attorney). However, care should be taken when forming the agreement, as the community property agreement itself could result in unwanted consequences if not handled properly.
Risks
Unwanted consequences of an automatic distribution or proportions: If community property is not classified appropriately, an unintended consequence of a community property agreement is that property that one spouse may have wanted to retain for themselves, or an asset that a spouse would prefer to give to their heirs (such as a house), could be considered community property and therefore automatically passed to the other spouse upon death or dissolution. Alternatively, if community property is not classified correctly, a spouse may receive a disportionate amount at dissolution or death when it is not the parties intent.
One size does not fit all: As with all estate planning tools, community property agreements do not suit everyone’s needs. There are many aspects to every family situation to be considered, and each needs to be considered before entering into a community property agreement or any other possible estate plan.
Limited Scope: A community property agreement may also be inappropriate, because it only applies to property acquired after execution of the agreement. Therefore, assets owned prior to marriage, or assets given to one spouse as a gift or as an inheritance, will not be considered community property.
How to Draft a Valid Community Property Agreement
To draft a community property agreement form, either spouse may create a draft and take it to the other spouse to negotiate the terms of that draft. Preferred forms are often online or from legal publishers with blanks for personal annotation. At least one spouse should take the draft to a family law attorney for engagement.
Once legal counsel is hired, he or she will review the proposed draft with both spouses. Then based upon the terms agreed to by each of the spouses, counsel will draft an agreement, using a form from a legal publisher . Each spouse will sign the agreement in front of the other while observing the notary or notaries administer their credentials onto the notarial certificate. Each spouse will pay the notary each of $5.00, or tuition prepared by the notary in an amount ranging from $100.00 to $200.00, for 1 to 4 pages. Then each page will be signed in the presence of the notary.
Finally, the notary will record the document with the county. At that time, the community property agreement will be valid.
Common Pitfalls to Avoid When Establishing a Community Property Agreement
One of the most obvious and easy-to-avoid errors is assuming that a community property agreement form created in another state will work just as well in Washington State as it does my neighbor Joe who also has his property here in Washington State. That is simply not the case. There are essentially two ways to own property in Washington State as a married couple. The first is community property, which involves the property jointly owned by either one spouse or both spouses and that was acquired during the marriage. The second is separate property, which is everything owned by either spouse separately before marriage, during the marriage by gift or inheritance, and any income resulting from separate property. It does not matter if one spouse’s name is on the title to a piece of property, if they are using a community property agreement then it is community property and subject to distribution in a divorce. Even if the language of the community property agreement form is sufficient, there are still a couple of common mistakes individuals make when trying to create a community property agreement. One mistake is failing to have the agreement properly signed and notarized. Here in Washington state, a community property agreement must be signed over a period of at least two years before it is effective and for this reason we normally recommend that clients maintain execution of a notary as well as a witness and signature, which means taking the agreement to a notary and to a court notary that acknowledges it and has it attached to the court record, which is another recommended option. With this option, it would be the official copy and is also good to carry with you digitally on your smartphone just so you have it on hand.
Amending or Revoking a Community Property Agreement
Modification or Revocation of a Community Property Agreement
The statutes governing community property agreements and their revocation or modification are found under Chapter 26.16 RCW, and also, under the community property chapter where couples have opted into the election. See RCW 26.16.210. This community property agreement form may be amended or revoked any time before formation of the community, which is at the time of the marriage. In other words, the agreement should be executed prior to the marriage and therefore, there is no community property to divide if it is executed prior to the marriage. But, once the couple has married, if there is a community property agreement in place, the divorce follows the community property laws of Washington State which, in that regard, are very different from the separate property state laws. As previously mentioned, the community property agreement may be amended or revoked at any time prior to the formation of the community. Additionally, when the parties have entered into a community property agreement based on the provisions of Chapter 26.16 RCW, they may revoke their community property agreement by complying with the provisions of RCW 26.16.210. If the community property agreement is a divorce agreement entered into by the parties pursuant to and subject to the terms of RCW 26.16.100, the agreement and judicial decree dissolving the marriage shall terminate the community property agreement if the decree specifies that the community property agreement shall terminate upon entry of the decree of dissolution and the decree and agreement may be merged. Whether the community property agreement is a community property agreement stating that all property acquired during the marriage will be community property no matter the title vesting, or whether the community property agreement resembles a property settlement negotiated as part of a dissolution proceeding, i.e., a relinquishment of the right to claim separate property or a specified property award of documented property to one party, the terms of the community property agreement must be adhered to by the parties and the court when distributing the spouse’s property.
Community Property Agreements in Washington State FAQ
What is the purpose of a Community Property Agreement Form?
A Community Property Agreement Form allows a married couple to leave their property and assets to each other in the event of death.
Why do I need this form if everything will go to my spouse automatically anyway?
It’s true that everything usually goes to your spouse in the event of death without a Community Property Agreement Form, but having one in place basically makes sure there are no unnecessary complications or red tape. It also allows for a power of attorney to be managing the estate if both parties die at the same time.
How does a Community Property Agreement Form work?
There is a process to properly open and probate the estate. This involves both spouses having a will that leaves all property to the other , and having both parties survive the other, or having the powers of attorney outlined in the Community Property Agreement Form.
What happens if both spouses complete a Community Property Agreement Form?
If both spouses complete a Community Property Agreement Form, the property of the parties becomes community property upon the death of the first spouse. The surviving spouse should present the original Community Property Agreement Form to the financial institution (i.e. banks, brokerages) holding the asset, deed to real estate, etc. to have the property transferred to the survivor.
How long does the Community Property Agreement Form last?
It lasts for the length of the marriage, and will be in effect even if the form is not signed until years into the marriage.