For Married Couples: Community Property Agreements
- What Is a Community Property Agreement?
- Advantages of Community Property Agreements
- Disadvantages of Community Property Agreements
- Administration of Property Subject to a Community Property Agreement
What Is a Community Property Agreement (“CPA”)?
A CPA is:
- A written and
- Notarized agreement (ie, a written and notarized contract),
- Between and signed by a married couple that
- Provides for any one or more of the following three results (known in the legal literature as “the three prongs”):
- The First Prong: Declares that either all property, or an itemized list of property, currently owned by either or both of the spouses is community property.
- The Second Prong: Declares that either all property, or an itemized list of property, acquired in the future by either or both spouses is community property (effectively converting receipt of future gifts during life or at death from the recipient’s separate to their community property).
- The Third Prong: Provides for the disposition of community property upon the death of the first of the spouses to die. The typical CPA provides:
- Only for the disposition of property upon the death of the first spouse to die. An argument could be made that a CPA can also provide for the disposition of the property upon the death of the surviving spouse, but this possibility remains to be confirmed by a Washington Court.
- That at the death of the first spouse to die, their community property will pass to the surviving spouse. Here, too, an argument could be made that it may pass to one or more other parties, but this argument as well has yet to be confirmed by a Washington Court. RCW 26.16.120
For purposes of probate avoidance:
- Regarding the property subject to the CPA: The CPA must provide for the disposition of the property upon the death of the first of them to die (ie, “the third prong”), and all discussion of CPAs on this website will assume that they provide for such disposition.
- Regarding all the property held by the first spouse to die, all of his/her property must be subject to the CPA (or be held as a nonprobate asset in some other way, such as joint tenancy). If all the property held by the first spouse to die is subject to a CPA (or held as a nonprobate asset in some other way), then no probate should be necessary, although any Will of the Decedent is required to be filed with the Court. RCW 11.20.010 All discussion of CPAs on this website will assume that all the property held by the first spouse to die is subject to the CPA (or be held as a nonprobate asset in some other way, such as joint tenancy).
For an example of a typical (“three prong”) CPA that provides for all current and future property to:
- Be community property, and
- Pass to the surviving spouse, see:
Advantages of Community Property Agreements
- CPAs avoid probate for the first spouse to die.
- CPAs prevail over non-spouse survivors in joint tenancies. Lyon v. Lyon, 100 Wn. 2d 409 (1983)
- CPAs prevail over inconsistent Wills. Estate of Lyman, 82 Wn.2d 693 (1973)
- CPAs prevail over inconsistent pension plan beneficiary designations. Harris v. Harris, 60 Wn. App. 389 (1991).
- CPAs don’t jeopardize the surviving spouse’s receiving a Double Step-Up in Basis for income tax purposes at the death of the first spouse to die. IRC § 1014(b)(6).
- Arcane & exotic: If the death of one of the spouses is relatively but not immediately imminent, a CPA may be used to obtain a step-up in basis for appreciated separate property of the other, “healthy” spouse (that spouse subjects his/her appreciated separate property to a CPA, and following the death of the other spouse, the property returns to the “healthy” (surviving) spouse, now with a Double Step-Up in Basis). This is a gamble, however, because to obtain the stepped-up basis, a year must pass between the initial transfer and the transferee’s death; otherwise, at the transferee’s death, the transferor receives the property back with its original carry-over basis and has unnecessarily wasted an amount of his/her gift tax exemption amount equal to the value of the transferred property. IRC § 1014(e)(1) As is typical for tax statutes, this one is silent on intent and provides no exception for unintended circumstance. Consequently, a wealthy spouse who for the best of intentions subjects appreciated separate property to a CPA and whose spouse dies unexpectedly within the year gets the property back with its old basis.
Disadvantages of Community Property Agreements
Practically speaking, the majority of persons who enter into CPAs do so so that upon the death of the first spouse to die, the property will pass to the surviving spouse outside of probate. Unfortunately, numerous disadvantages remain:
- Doesn’t Cover Surviving Spouse: CPAs cover the disposition of property and the avoidance of probate upon the death of only the first spouse to die, rarely both spouses. Consequently:
- The first spouse to die relinquishes all right to direct the passing of his/her half of the community following its passing to the surviving spouse. The surviving spouse gains the unfettered ability to give the property to whomever he/she desires, during life or at death, for example, to a new spouse following remarriage or to children not of the first spouse to die.
- Without taking further actions, a probate will likely be necessary upon the death of the surviving spouse.
- Can Result in Possible Unintended Disinheritance: CPAs may cause unintended disinheritance, for example, a Will of the first spouse to die that provides for children of a prior marriage.
- Ineffective for Simultaneous Deaths: For a CPA to be effective, a spouse must survive. Consequently, if both spouses die simultaneously, any CPA they may have will be ineffective, and two probate proceedings will likely be necessary, one for each spouse.
- Requires Both Parties’ Consents to Revoke: CPAs, being contracts and governed by contract law, cannot be rescinded or revoked without the agreement of both parties (ie, a second contract) or the entry of a Decree of Dissolution of Marriage. Estate of Bachmeier, 147 Wn.2d 60 (2002) [spouses separated; one spouse filed for divorce; the other spouse executed a will disinheriting the filing spouse]; Higgins v. Stafford, 123 Wn.2d 160 (1994) [spouses later executed not only mutual wills but also a will agreement]; Estate of Wittman, 58 Wn.2d 841 (1961) [spouses later executed inconsistent wills]. The irrevocable nature of a CPA can be problematic, for example, if:
- During Incapacity: A spouse loses capacity or disappears (the incapacitated spouse’s guardian will need to consent; Estate of Brown, 29 Wn.2d 20 (1947));
- During Divorce Proceedings: A spouse files for dissolution of marriage (the Agreement will terminate only upon the filing of a Decree of Dissolution, not upon the filing of the Petition for Dissolution; Marriage of Pilant, 42 Wn. App. 173 (1985); Estate of Catto, 88 Wn. App. 522 (1997));
- Prevails Over Prior Will: The CPA is inconsistent with a prior Will (the CPA will prevail; Estate of Lyman, 82 Wn.2d 693 (1973));
- Can’t Be Revoked by Later Will: A spouse attempts to revoke the CPA by executing a later Will (the CPA will prevail; Estate of Brown, above; Estate of Catto, above)).
- But CAN Be Revoked by Later Mutual Wills: Higgins v. Stafford, 123 Wn.2d 160 (1994).
- May Be Ineffective for Real Property Outside of Washington: CPAs will likely be ineffective to transfer title to real property outside of Washington, especially if the real property is not in one of the other community property states.
- Subjects Own Property to Debts of Other Spouse: CPAs may subject what before the CPA was one spouse’s separate property to attachment to pay for the debts of the other spouse.
- Doesn’t Eliminate Need for a Will: CPAs don’t eliminate the need for a Will, for example:
- To nominate a Personal Representative in case one is needed for reasons other than asset marshalling, management, and distribution;
- To nominate Guardians for any minor children;
- To provide for any variation away from the results of the Washington Simultaneous Death Act;
- To provide for any variation regarding the source of funds for any estate tax payment away from the results of the pertinent Washington statute.
- First Spouse to Die Loses Estate Tax Applicable Exclusion Amount: CPAs are ineffective to take advantage of the applicable exclusion amount in the estate of the first spouse to die. If the spouses’ combined estates are sufficiently large (currently, in 2005, over $1.5 million ignoring appreciation following the death of the first spouse to die) so they could obtain some estate tax savings through the use of an estate tax credit shelter trust, they will forego obtaining those tax savings by using a CPA.