Community Property Agreements
What Washington Residents Need to Know
COMMUNITY PROPERTY CONFUSING
Whether I am counseling clients or teaching classes, I constantly run into couples confused about community property. It seems that once we know Washington is a community property state, most of us think we know all we need to know about community property law. When I explore the matter further, it turns out that much of what is commonly believed is incorrect. I see this lack of knowledge hurting people in their planning.
I am going to cover in this article some of the common misunderstandings about community property.
Let’s first look at the definitions of both “separate property” and “community property” in Washington State.
DEFINITION OF COMMUNITY PROPERTY
Anything you own before the marriage, anything you are given or inherit during the marriage and anything you bring with you to Washington from a separate property state is “separate property” (although there is a concept called “quasi-community property” that applies to property from other states). If you are Washington residents, anything you or your spouse acquire during the marriage by work that either of you do is “community property”. Like everything involving the law, the rules on community property can get complicated but this is a good starting definition.
In the case of divorce or death, it can become important to know whether property is community property or separate property. In either situation, the “community” versus “separate” nature of the property can determine who gets the property.
Let’s take a look at an example of community property law being applied with a surprising outcome.
A husband has an individual retirement account (IRA) and, unbeknownst to him, an unhappy wife. Before his wife dies, she makes a will saying that everything she owns goes to her children from a previous marriage. Even though the husband’s name is on the IRA, it is community property because he earned it while he was married and living in Washington State. Thus, his wife owned one-half of the IRA and he will have to write a check giving his stepchildren one-half of his IRA. Ouch.
COMMUNITY PROPERTY AGREEMENT
Unlike the wife in the above example, if you are like most people, you want your assets to go to your surviving spouse on death. Many people think this happens automatically to community property in Washington. As you can see from the above example, it does not happen automatically. You can leave your one-half of your community property assets to whomever you wish. However, if you do want your surviving spouse to own all your Washington property when you die, then you can choose to sign a contract with your spouse called a “community property agreement.” The beauty of a community property agreement is that if you and your spouse sign a community property agreement, then typically there will be no probate on the death of the first spouse.
I get many calls from clients thinking they want to have me prepare a revocable living trust for them. However, for a middle-class couple in a first marriage living in Washington, often a community property agreement is a much simpler alternative to a revocable living trust. Like all things legal, one size does not fit all and there are some important considerations for you to review before selecting a community property agreement as an appropriate planning device – but many times it is exactly the right way to achieve your goals in the simplest manner possible.
The following are some common examples of when a community property agreement is probably not for you: (a) if you are in a second marriage and want to make provisions for your children from a first marriage; (b) if you have a taxable estate; and/or (c) if you have a disabled spouse who may need Medicaid to pay for his or her long term care.
One common misconception is that if you move here from a separate property state – say Oregon – all your property automatically becomes community property when you cross the state line. That is incorrect. However, if you have moved to Washington from Oregon and want your property to be community property, you can sign a community property agreement and agree everything you own is community property.
STEP-UP IN BASIS
Among the important issues to consider with regard to community property is that on the death of the first spouse, the survivor gets a “step-up in basis” (and in today’s economy, maybe a “step down”) to date-of-death fair market value for income tax purposes in both halves of appreciated community property. This can significantly reduce capital gains income tax for your surviving spouse. This is not the case if you own separate property even if you each own one-half of the property. Of course, one of the less than pleasant things to keep in mind is that signing a community property agreement can have consequences if your marriage ends in divorce.
Another thing to pay attention to if you are considering a move to a “separate property” state such as Oregon, is how to keep your property “community property.” You should get good legal help so that your property stays “community property” even after you move. This is because you will probably want to retain the community property advantage of the full step-up in basis on the death of the first spouse.
Although on the surface “community property” sounds like a simple idea, hopefully the above discussion has shown that paying attention to the details can make things a lot simpler for your family.
Should you REVOKE your COMMUNITY PROPERTY AGREEMENT and use a special needs trust?
Many of my clients who are in their late 60’s or older are revoking their Community Property Agreements and using a Testamentary Special Needs Trust to protect their assets from being wiped out if their surviving spouse needs nursing home care.
This is especially true of my clients who cannot qualify for long term care insurance.
A testamentary special needs trust is a very powerful Medicaid planning technique but you can only do it while your spouse is alive and your are competent.
If you are at this point in your life, contact me for an appointment to review your estate planning.
Elizabeth A. Perry, a member of the National Academy of Elder Law Attorneys, has been helping Clark County residents with their estate planning needs for over 20 years. Her practice emphasizes wills, trusts, probate and Medicaid planning. You are invited to call her to schedule an appointment or sign up for a class at (360) 816-2485. ©Liz Perry 2015
(The above should not be construed as specific legal advice and is intended for general information purposes only)
Estate Planning in Washington State – Revoke Community Property Agreement