Community property agreements in Washington

What is a Community Property Agreement?

The Washington State Uniform Community Property Act was enacted in 1929, and had not been substantially amended since. Washington now has a new Uniform Community Property Act (RCW 26.16.120). The purpose of Washington’s community property law is to provide certain presumptions regarding marital property in the absence of an agreement between the parties. Washington is not unique in this regard. "Many states have community property laws, based on Spanish and Mexican law, which treat property acquired during a marriage by either spouse as community property. The primary rule is that property acquired during a marriage is community property, unless it is acquired by gift or inheritance." James W. Moore et al., Washington Law and Practice Family Law § 1.19 (2013).
Marriage changes the character of the property of each party, including the nature of the income earned during the marriage, the income from personal property owned by either party at the time of the marriage, the rent from real property owned by either party at the time of the marriage; and the proceeds of either party’s personal effort . However, Washington recognizes that married persons should be allowed the option to enter into an agreement to determine the character of their property.
RCW 26.16.120 "provides an easy mechanism for protecting the separate property of one spouse from claims of the other spouse. A community property agreement is a document signed by both spouses while married, designating specified property as community property." Id. Each spouse is allowed to make a unilateral declaration within the community property agreement, subject to the rights of any creditors. The effect is that all of the separate property subject to a community property agreement becomes community property, without any action required by the spouses, like a quitclaim deed.
Characterizing property as "community property" under Washington law has significant legal implications. For example, "[u]nder Washington’s community property law, property acquired by married persons is community property unless it is separated out through an effective agreement supporting separate character, or by gift or inheritance." In re Custody of B.R.C., 176 Wn.2d 180, 186, 288 P.3d 295 (2012).

Advantages of a Community Property Agreement

In Washington State, a community property agreement serves two primary functions. First, it simplifies the transfer of community property in the event of the death of one of the parties. Second, it can help minimize estate, gift and inheritance tax liability.
When a spouse dies without a community property agreement, it may take an Order from the court to transfer any community property that was owned by the deceased spouse to his/her spouse. A community property agreement helps avoid this additional step. In the absence of such an agreement, for instance, if the first spouse dies leaving a will, the surviving spouse cannot be sure how the will will affect the community property; it is conceivable that the community property could be owned in a manner that makes it difficult for the surviving spouse to hold or sell it.
Washington law allows for a community property agreement that provides that all the property that was owned by either or both of the spouses at the time of death, including both community property and separate property, will belong to the surviving spouse. Such an agreement transfers upon death the community property and the separate property that is owned jointly by the spouses to the surviving spouse unless prior to death, a spouse revokes the community property agreement in whole or in part.
A community property agreement may reduce the tax burden after a spouse’s death. For instance, married couples may eliminate gift and inheritance tax on property passing to the surviving spouse where that property passes by joint tenancy at death. A transfer by a community property agreement may have the same tax advantages.

How do you establish a Community Property Agreement?

In order to create a valid and enforceable community property agreement, all spouses must either sign the agreement or subsequently ratify it. Any written instrument that is signed by both spouses and contains the required explicit declaration of intent to create community property is sufficient to create a community property agreement, unless one spouse sets aside the agreement through the court system. Also necessary are property descriptions and specified values for the property being changed to community property. A failure to expressly state the estate planning purpose of the community property agreement will not by itself render the agreement invalid. Written evidence that creates a presumption that the spouses intended for all property held by one or both spouses to be community property will be satisfactory. Such evidence includes but is not limited to a validly executed inter-spousal gift deed conveying all property from one spouse to both spouses.
Washington also requires that spouses complete and attach a community property agreement worksheet to the community property agreement. The worksheet includes identifying information on the spouses, the date on which the spouses were married, the date that their marriage became irrevocably void, the property that is being changed to community property, and the initial estimated value of all property that will become community property. This document must be signed by each spouse in the presence of two witnesses. All witnesses must also sign the worksheet. These signatures by the witnesses can be either interested or disinterested.
In most cases, spouses will require help from a legal professional in drafting a community property agreement. Because spouses cannot merely change the ownership of their property and real estate to community property by signing a deed or a bill of sale, in almost all situations, spouses need a legal professional to prepare the community property agreement and the community property agreement worksheet for them.

Some limitations to Community Property Agreements

One notable limitation regarding community property agreements in Washington state pertains to the rights of creditors and estate planning ramifications. As previously mentioned, Washington is among the few states that allow for the elimination of probate on death, meaning that the decedent’s assets are transferred directly to their beneficiaries. With this short-cut to death, however, there are corresponding risks to beneficiaries. In Washington, "probate" can be avoided upon a "community property agreement" under RCW 26.16.120 which states:
Whenever any person, married or single, shall own, free from encumbrances, any property, which would have been community property had the person been married throughout the time he or she owned it, and either prior to or upon the dissolution of a marriage the person may, by a written agreement with any person whom he or she might have married, convert the property to community property, regardless of any of the provisions of RCW 26.16.010 through 26.16.080. The amount of the property so converted shall in all cases be equal to one-half of the value of all the existing property being converted to community property by the agreement. Upon conversion to community property such property shall thereafter be subject to all the provisions and rules of community property, including RCW 26.16.030.
Given that Washington’s community property agreement, also known as a "conveyance to spouse" creates a third-party trust with the spouse as beneficiary, each spouse cannot convey property to terminate the trust without the other spouse’s signature. For example, under Mt. Isa Mines Ltd. v. Copper Basin Mining Corp., 77 Wn.2d 764 (1970), a quasi community property trust in Idaho became an asset of the debtor’s bankruptcy estate, rendering the community property agreement ineffective. Similarly, courts have held that the pre-death conveyance creates an interest in the creditor of one of the spouses. See, e.g., In re Walker, 42 B.R. 738, 740 (Bankr.D.Utah 1984).
In addition, Washington also recognizes the possibility that the spouse, as beneficiary may be contingently liable to creditors. RCW 26.16.240 states:
The rights of the creditors of the husband or wife, or of both, to attach, garnish, or otherwise make use of the separate personal estate of the husband or wife, and the community estate, and to execute execution against any community property, shall not be changed or affected by reason of the community being converted to community property. Nothing in RCW 26.16.240 shall be construed to affect the rights of the creditors of one spouse to a claim, demand, or judgment, in an action brought by the spouse.

Community Property Agreement v. other legal documents or methods

Washington State law offers a few options for couples seeking to establish the character of their property. A community property agreement is not the only option. Here’s how it compares with joint tenancy and prenuptial agreements.
Joint Tenancy
Joint tenancy is a form of real estate ownership in which two or more people own the property equally. If one of the owners dies, the other(s) automatically gain 100% ownership of the property. Joint tenancy does not carry over to property the deceased owner held solely in his or her name, and just because property was purchased jointly, does not mean the owners have joint tenancy. Owning a vehicle jointly, for example, does not automatically give survivors ownership of 100% of the vehicle’s value. Because the term "joint tenancy" refers strictly to land ownership, it does not apply to non-real estate assets, such as money or stocks, though these assets can certainly be owned in joint tenancy. Joint tenancy may not be the best option for spouses whose relationship is at risk of ending badly due to divorce , death, or one party’s financial irresponsibility, because it limits their options to divide or bequeath their property according to their wishes.
Prenuptial Agreements
Prenuptial agreements are a very private tool that are an antonym to community property agreements in that they stem from distrust of the other spouse. They have the added (and substantial) benefit of entering greater flexibility. A community property agreement is an all-or-nothing solution that applies to all community property acquired during a marriage. Because they apply to all community property, community property agreements cannot be effectively customized to divide property acquired in different ways or subject to different statutes. A prenuptial agreement, on the other hand, can make custom rules for all aspects of each spouse’s life: property division, debt division, spousal maintenance, the division of business assets, and even the custody of children can be specified in a prenuptial agreement. Such an agreement can either affirm or supersede a community property agreement.

Revocation and amendment of Community Property Agreements

In Washington State, a married couple can express their intent to be governed by community property laws through a community property agreement. Such agreements are permissible under RCW 26.16.120 and the associated case law. However, there may be circumstances in which one or both spouses wish to revoke or amend the community property agreement.
RCW 26.16.140 provides for the revocation of community property agreements. It states:
Any husband and wife may revoke a community property agreement made by them, and may make a new community property agreement, by mutual consent in writing, signed by both, with notice to the department of revenue and the estate tax planning department of the state of Washington.
Washington Courts have clarified that the requirements of RCW 26.16.140 must be strictly followed, otherwise the revocation is ineffective. See In re Marriage of Emry, 77 Wn. App. 477, 892 W.2d 1129 (1995). In that case, although the court found that the parties intended to revoke their prior community property agreement, their failure to comply with the statutory requirements rendered the revocation ineffective.
Additionally, amending a community property agreement by new contract pursuant to RCW 26.16.140 is not permitted when there is a conflict with existing law. As held in a Washington Court of Appeals case, "A community property agreement cannot operate to alter a term fixed by the legislature in another statute." In re Marriage of Emry, 77 Wn. App. 477, 892 W.2d 1129 (1995). It bears noting that where an amendment conflicts with a statute other than the community property statute, severability may be appropriate. Id. At the same time, amendments to community property agreements do not result in the loss of the characterization of property as community property; community property will remain as long as it is "inextricably intertwined" with community property. In re Marriage of Emry, 77 Wn. App. 477, 892 W.2d 1129 (1995).
In exercise of the right to contract, married people in the state of Washington are permitted to enter into community property agreements, and to adjust those agreements in the future with compliance to statutory requirements.

Common questions about Community Property Agreements

Frequently Asked Questions About Community Property Agreements in Washington State
What is the purpose of a community property agreement?
The primary purpose is to make certain assets go to the surviving spouse without going through probate (which is the process that happens after someone dies.) Probate is the process where a court confirms that the Will is valid, finds out what assets were owned by the deceased person, and distributes those assets according to the Will. Having a valid Will does not avoid probate—it only tells the court how to distribute the assets.
A community property agreement has the effect of "having a Will" as to community property for married people, as opposed to separate property for single people, but it is an automatic. So, property owned by a married couple prior to death passes to the surviving spouse without the necessity of probate, just like an asset owned by a single person with a valid Will.
Will my Will still control my estate if I have a community property agreement?
No. Once you make a community property agreement , it controls all disposition of community property on your death; however, you can always revoke the community property agreement and restore the law prior to its making.
How do I revoke a community property agreement?
You should consult with an attorney because "error" can have a significant impact on your estate. In general, it is a mutual process of writing a valid waiver and having both spouses sign it. It usually requires the services of an attorney.
My spouse and I want to make a community property agreement. Do we need an attorney?
The community property agreement itself is a very basic document, so you do not need an attorney to create one. However, you cannot "get legal advice" about the community property agreement without a lawyer because the lawyer obviously cannot give legal advice to one party without giving legal advice to both since their interests are directly adverse to each other. This means you can not get legal advice about whether to create a Community Property Agreement. You can, however, talk to a lawyer about the consequences of such an agreement.