Estate planning too important to ignore

By Beau Ruff

Property owned by a spouse does not automatically transfer to the surviving spouse at death. Instead, something more is needed in the estate plan to accomplish this feat.

In all the complexity of the estate plan, the community property agreement is one document in particular that offers simplicity, and yet still is a powerful component to an estate plan. It can be drafted on a single page and contain fewer words than this column. And, it provides (in this author’s opinion) the simplest, most cost effective and powerful method to transfer assets between spouses at death.

“But Washington is a community property state, so why do I need a community property agreement?” Great question.

The fact that Washington is a “community property state” carries with it a specific meaning. It means generally that all property acquired during marriage is community property, and it is owned one-half by each spouse. All property acquired either before marriage or during marriage but by gift or inheritance remains “separate property” (i.e., not community property).

This is all that it means when we say colloquially that Washington is a community property state. It’s a statement as to the character or nature of the property acquired by a married couple. It does not mean that the surviving spouse has an interest in all the property, and it does not mean that the surviving spouse is automatically entitled to the property at the death of the first spouse. It does not mean that the property vests in the surviving spouse automatically. The law requires something more to accomplish all this.

The concept of community property comes from Spanish civil law and is relatively unique in the United States. Just nine of the 50 states are so-called community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

Most of those states are located in the western United States where the law was established likely for a couple of reasons. First, it was likely an enticement for women to move to those states (lured by joint ownership of assets). Second, it was likely established out West because those states that included community property concepts in their constitutions adopted them later than eastern states and during a time when women’s rights were advancing nationally.

The community property agreement is between spouses concerning the character and disposition of community property. It is specifically authorized under Washington law and codified under RCW 26.16.120. It typically adds two important prongs to the general community property law outlined above.

First, it provides that the spouses agree that all property acquired at any time be treated as community property. Even though a portion of a couple’s property may have been acquired before marriage or by gift or inheritance and therefore not technically community property, the couple are agreeing that it shall nonetheless become community property in character. So, the first prong changes all property, whether separate or community, into community property. The second prong says that at the death of the first spouse, all community property shall automatically vest in the surviving spouse.

The community property agreement provides the means to accomplish what most people understand the basic community property laws provide: the vesting of all property in the surviving spouse upon death.

This agreement is not right for everyone, however. It does not work well for couples who have an estate subject to the estate tax (for 2019, those are estates valued at greater than $2.129 million for purposes of the Washington estate tax).

It also doesn’t work well if the couple are planning on implementing specific creditor protection strategies in the estate plan. And, because it necessarily gives all assets to the surviving spouse, it doesn’t work where the plan is to not give all assets to the surviving spouse. For example, where a person has specific gifts outlined to children or where the couple has a blended family (think second marriage with “his,” “hers” and “ours”) and wishes to preserve the interests of the biological children in their inheritance, then the community property agreement may not work best.  But for the average couple that simply wants all assets to go the survivor, the agreement could be the best way to transfer assets.

Of course, it is always best to seek the advice of a skilled estate planning attorney to figure what works best with your unique set of facts. But don’t feel put off by the complexity of the estate planning documents or the estate planning process. It is important to have the estate plan in place and it need not be an arduous process, especially if the community property agreement is included.

Attorney Beau Ruff works for Cornerstone Wealth Strategies, a full-service independent investment management and financial planning firm in Kennewick.

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