Community Property Agreement: Should I have one?



Community property agreements are agreements between spouses or domestic partners to label their property as community property. In general, all items of property of married couples and domestic partners are classified as community or separate property, depending on when and how they were acquired. A property's characterization affects each spouse's or partner's rights and interests.


When a married couple or a couple in a domestic partnership enters into a community property agreement, all of their property, separate and community, becomes community property upon the death of the first spouse or partner. In such an agreement, the couple may also immediately characterize all their current assets, as well as any future assets, as community property.


Typically, the purpose couples have in mind when entering into community property agreements is to avoid executing a will which requires going through probate proceedings. In some states, where probate is unduly expensive and time-consuming, avoiding probate can be a good idea. In Washington State, however, probate is often relatively fast and inexpensive. Moreover, there are several disadvantages and potential unintended consequences that may result from entering into a community property agreement, often making it a poor choice as a will alternative.


Reduced Protection from Creditors


If the personal representative follows the steps correctly, then any creditors who wishes to make claims against an estate must do so within a 4-month timeframe. In addition, creditors must follow the proper probate steps in Washington, or the claim will be lost forever. This benefit is lost if an estate does not go through probate, so when a couple has created a community property agreement instead of executing wills, creditors may have much more time to bring their claims against the couple’s property. In addition, changing the character of separate property to community property means that any formerly separate property becomes subject to the debts of the marital community, and creditors of one spouse or domestic partner will be able to recover from the community property, even though they might not have been able to reach that property had it remained separate property.


Issues related to Wills and Probate


Any will executed before your community property agreement may be overridden by your community property agreement, which may revoke all or portions of your will.


for example, you might have made a gift to a child from a previous marriage in your will, and subsequently execute a community property agreement. Unbeknownst to you, the gift will go to your spouse or domestic partner regardless of what was stated in your will. Therefore, you should be sure draft a new estate plan at the time you sign your community property agreement.


A community property agreement is not typically an adequate substitute for a will. This is because a CPA merely converts separate property into community property; it does not “give” the property to anyone. The law of descent and distribution in intestacy (dying without a will) assumes that the community property will automatically pass to the surviving spouse or domestic partner. Community property agreements, which are less flexible than wills, do not allow binding gifts to anyone but the surviving spouse or domestic partner.


Additionally, only nine states recognize community property laws. The courts in another state may not recognize a community property agreement if a couple owns property there, and in such situations a probate proceeding may be required.


Divorce


As opposed to a will, a community property agreement determines how a couple's property is characterized and then divided in the event of divorce or dissolution of a domestic partnership. Furthermore, once a community property agreement has been signed, it can only be terminated with the mutual consent of both spouses or partners, whereas a testator can revoke his or her will at any time, unless they have entered into a binding agreement not to do so (such as a mutual will).


As always, speak to an attorney before you prepare a community property agreement.