A community property agreement is an agreement between spouses or state registered domestic partners to characterize their property as community property. Ordinarily, every item of property of married couples and domestic partners is characterized as either community property or separate property depending on when and how the property was acquired. The characterization of the property affects the legal rights and interests that each spouse or partner has in the property.
Married couples and couples in domestic partnerships can enter into a community property agreement whereby all of their property, both separate and community, becomes community property upon the death of the first spouse or partner to pass away1. Such an agreement may also be used to immediately characterize all of the couple’s currently-held property, and any property acquired in the future, 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 proper steps in a probate case in Washington, there is a strict requirement that creditors must make any claims against the estate within a 4-month window of time or else lose their claims 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
A community property agreement trumps and may revoke all or portions of any will executed before the agreement was made. If a person has made a will that gives a gift from his or her one-half share of community property to a person other than the person’s spouse or domestic partner — for example, to a child from a previous marriage — and the person subsequently executes a community property agreement, the gift will go to the person’s spouse or domestic partner regardless of what was stated in the will. Therefore, it is possible to unintentionally disinherit a loved one when making a community property agreement.
A community property agreement merely converts separate property into community property; it does not “give” the property to anyone. The expectation is that all of the community property will automatically pass to the surviving spouse or domestic partner under the laws of descent and distribution in intestacy. Unlike a will, which is more flexible, a community property agreement cannot be used to make binding gifts to anyone other than the surviving spouse or surviving domestic partner.
Furthermore, only nine states are community property jurisdictions that recognize community property laws. Therefore, if a couple who has entered a community property agreement owns property in another state, the courts in that state may not recognize the agreement and may require a probate case to be commenced in that state.
Divorce
Unlike a will, a community property agreement has an important effect on how the property of a couple is characterized and then divided in a divorce or a dissolution of a domestic partnership. Also, once entered into, a community property agreement can only be terminated with the mutual consent of both spouses or partners, whereas a testator may revoke his or her will at any time unless the testator has entered a binding agreement not to do so (such as with a mutual will).