Let’s say that you and your spouse have a joint checking account and you both work. You earn $70,000 and your spouse earns $50,000. It all goes into the same pot, so you might logically say something like, “yeah, we both own it, but I contribute more to it.”
But in Washington State, you’d be a little bit wrong. The checking account is owned by both, BUT both of you contribute equally to it.
How?
In Washington, all assets that are acquired during the marriage are owned 50% by one spouse and 50% by the other spouse. Your paycheck for $70,000? Only $35,000 of that is yours. And you own $25,000 of your spouse’s salary. So you are both contributing $60,000 each to your joint account. That’s community property in Washington State, but not all states have community property and not all states define in as a strict 50/50 split either.
Sidebar: Community property states include Washington, Idaho, California, Arizona, New Mexico, Nevada, Texas, Wisconsin, and Louisiana. In Washington and California, community property means a 50/50 split of all assets and debts acquired during the marriage. The other community property states take a softer view and call for “equitable division” of the community property upon divorce. Many of the states without community property, like Florida, New York, and Oregon, divorce laws follow the rules of “equitable distribution.” The main difference here is that equitable doesn’t always mean equal in a divorce; the court aims for what is “fair” over a stricter numerical matching. In Washington, judges pay a lot more attention to whether the grand total at the end is as close to equal as is reasonable (though as any Washington State divorcee will tell you, it is rarely exactly the same value). But this blog isn’t about family law, so…
Why does community property matter for estate planning?
Let’s say you’re married and you die tomorrow intestate (that’s fancy for without a will). All of your community property goes to your spouse automatically. This is great because a) it’s super easy, b) your spouse has an unlimited exemption for state estate taxes on their inheritance from you, and c) your spouse also gets a “step up in basis” for any assets that have appreciated (think real estate, investments, etc — things that are worth more today than when you first bought them) which means your spouse will pay less capital gains tax if/when those assets are sold. It’s a pretty awesome benefit for your spouse, who now has to figure out how to live with out you.
Sidebar: Community Property Agreements are effective because of these spousal benefits. Basically, in a Community Property Agreement, you and your spouse agree that all of your current and future assets will be community property upon the death of the first spouse, and that all community property will pass to the surviving spouse. It’s one way to avoid probate for the spouse who dies first, BUT they are currently overpowered in my opinion, and infrequently used today. First, even during marriage, you can acquire separate property (WHAT?!? I know, keep reading) and you may not want it to become community property for a variety of reasons. Second, a community property agreement will override contrary designations in wills, joint tenancy designations and so forth. And third, probate is generally not a big deal for 99% of people — it’s not expensive in Washington, we have nonintervention powers so the courts basically keep out of it, and while it is a public record, most people would rather watch Game of Thrones than the wills of the recently deceased. /End rant
What is separate property and how is it different?
Separate property is any assets or debt that you owned before you got married, or that you received as a gift or an inheritance. In divorce, generally separate property stays separate, but it’s totally different in estate planning. Let’s take the same circumstances as above, but this time, you bought a house before you got married (or inherited a house from your Great Aunt Agnes while you were married). That house is separate property, so it does NOT automatically go to your spouse. The good news is that your spouse still has the unlimited exemption for state estate taxes and the step up in basis. But it gets complicated in terms of what exactly passes to your spouse (just look at RCW 11.04.015). If you have two kids, then the house goes 50% to your spouse and 25% to each kid. If you don’t have kids, then the house goes 75% to your spouse and 25% to your surviving parents (to split between them equally). Doesn’t that sound like fun?
Wait. It gets more complicated.
Separate property can become community property (even without signing a community property agreement). If separate property becomes “co-mingled” with community property, it will become community property. And unfortunately, whether property is “co-mingled” depends heavily on the specific facts of the situation. For example, you buy a house and then get married. The house is separate property. Then you use your paycheck (community property) to pay the mortgage (separate property). Then your spouse uses some of his inheritance from his mother’s death (his separate property) to renovate the kitchen on your (separate property) house. On the weekends, you both fix up the house — painting, minor repairs, general maintenance. At some point, this house will become community property. But at which point? Oy. It gets complicated — and this is where a clear estate plan can really help.
Sidebar: I wasn’t done ranting about community property agreements. Here’s one place where they can have unintended consequences. Let’s say that your parents leave their house to you and your brother jointly. You are now joint tenants in common with a right of survivorship, which means that when one of your dies, your half passes to the surviving sibling — and all this is set up in your parents’ wills. Except your brother executed a community property agreement with his wife. Now when he dies, all his property — including his joint tenancy with your house — become her property, and now you are joint tenants in common with his wife until one of you dies. Which means a house that would’ve been yours to pass to your kids could now become hers and pass to her kids. And maybe you are okay with that, and maybe you aren’t — but what very likely is that it is not what your parents’ intended. And this is basically what happened in Lyon v. Lyon, 100 Wn.2d 409, 670 P.2d 272 (1983), so you can read it for yourself. /End rant. Again.
Recap:
Community property is all of the assets and liabilities acquired during a marriage.
Separate property is all of the assets and liabilities acquired before a marriage, or received as a gift or inheritance during a marriage.
It matters for estate planning because community property passes to the surviving spouse automatically, even without a will, whereas separate property does not (which is why a will is so useful).
And Anna generally doesn’t like community property agreements. They are overpowered, can have unintended consequences if the people executing them don’t fully understand how they work, and are generally unnecessary since we already have nonintervention powers for probate, probates are usually inexpensive in Washington State, and privacy can be maintained through other devices when someone really wants to keep their affairs private. I’m not saying never use them — just be very sure that you know what you are doing and why you are doing it before signing one.