Washington and Idaho are both community property states. In these states, community property agreements may provide estate planning benefits for married couples.

Washington and Idaho are both community property states. In these states, community property agreements may provide estate planning benefits for married couples. Think of a community property agreement as the opposite of a prenuptial agreement - where a prenuptial agreement says, “This is what happens if we break up,” a community property agreement says, “This is what happens if we stay together until one of us dies, until death do us part.”

Many people mistakenly believe that once they marry, all of their property magically becomes community property, and upon the death of one spouse it automatically transfers to the surviving spouse. This is not true. Unless a married couple signs an agreement or co-mingles their separate and community property, gifts, inheritances, and property that a spouse owned before marriage remain separate property. Community property consists of wages earned during the marriage, property purchased with the wages earned during the marriage, and property converted to community property.

Each spouse can leave their half of the community property and all of their separate property to whomever they desire.

One benefit of community property is that the tax basis of a deceased spouse’s community property changes to the fair market value of the asset at the time of the spouse’s death.

A married couple can change all of their property to community property by signing a community property agreement in the presence of a notary public. Community property agreements come in two basic varieties: a vesting CPA and a non-vesting CPA.

VESTING COMMUNITY PROPERTY AGREEMENTS. The vesting CPA states that (1) all of the property owned by the husband and the wife is community property, (2) all property that they acquire in the future is community property, and (3) when one of them dies all of the community property automatically passes to the surviving spouse. Married couples with assets less than the amount exempt from both the federal estate taxes ($11.58 million in 2020) and Washington state estate taxes ($2.193 million in 2020) use a vesting CPA. A surviving spouse may file a vesting CPA and a certified death certificate with the county auditor on the first spouse’s death and avoid probating the spouse’s estate in Washington. The surviving spouse would also need to file an excise tax affidavit listing all of the real property being transferred using the community property agreement.

NON-VESTING COMMUNITY PROPERTY AGREEMENT. The non-vesting CPA states that all property owned by the husband and the wife is community property and all property that they acquire in the future is community property, but it does not distribute all of the community property to the surviving spouse. Married couples with assets in excess of the amount exempt from estate taxes use a non-vesting CPA so that all of the assets owned by each spouse achieve a tax-basis change at the time of the first death. However, it does not pass the assets directly to the surviving spouse. Instead, the deceased spouse’s share of community property passes under the deceased spouse’s Will as the deceased spouse directs.

TERMINATION. A CPA can terminate upon a specified event such as changing domicile from the community property state to another state, or by the parties signing another agreement revoking the CPA in the presence of a notary public. If the CPA terminates upon filing for divorce, it can make property acquired after the filing the person’s separate property and prevent the property from automatically transferring to a spouse if a person dies during the divorce proceeding.

RECORDING. A CPA must be recorded with the County Recorder's Office if it is used to transfer real property. Another benefit of recording is that a certified copy of the CPA can be obtained from the County Recorder if the original is lost. If a couple revokes a CPA, that revocation should also be recorded with the county auditor.

THE PROBLEM WITH COMMUNITY PROPERTY AGREEMENTS. A CPA may affect a married couple’s property rights if they divorce, since property ownership changes not only for tax purposes, but also for ownership and divorce purposes. If a person is considering leaving a marriage, he or she should not sign a CPA.

The benefits of a CPA for estate planning purposes include a change of tax basis on the death of the first spouse and the ability to avoid probate on the first spouse’s death if a married couple signs a vesting CPA. Of course, a couple must consider the potential problems that may arise if they divorce. In addition, people who do not want their assets to automatically pass to their surviving spouse, including for tax reasons, should not sign a vesting CPA.

If you have questions about community property agreements or how community property laws can affect your estate plan, give us a call at 253.858.5434 to set up an appointment today. We represent clients throughout Washington and Idaho and are available to meet in person (with appropriate social distancing protocols in place), by phone, or via video conference.