What exactly is community property?

The term community property refers to a particular form of property ownership which is authorized by statute. Washington is one of the only eight states in the United States which recognizes community property.  Community property exists only in the context of a marital relationship (or in a registered domestic partnership between partners of at least 62 years of age).  Unmarried couples who acquire property jointly may have certain rights and obligations in that property, but their assets are not legally characterized as community property.

In order to understand community property, it is helpful to first look at the concept of separate property.  Washington statutes provide that the property owned by an individual prior to the date of marriage is separate property.  After marriage, a person may acquire additional separate property by means of gift or inheritance.  The natural appreciation in the value of separate property, and any interest or income earned on separate property is also separate property.  If a married person suffers an injury for which they are later compensated in a personal injury claim, a portion of the recovery may be characterized as separate property.

All property acquired by other means after the date of marriage is considered to be community property or quasi-community property.  The concept of quasi-community property applies only in situations where a married person acquires property while living in another state.  Though statute requires quasi­-community property to be treated like community property when one spouse dies, that probably doesn’t mean it will receive the same treatment for tax purposes.

The distinction between community property and separate property is very important in estate planning.  The law provides that a person may give away all of their separate property but only 50% of the community property in their will.  A surviving spouse or registered domestic partner is always entitled to retain ownership of 50% of the community property, regardless of the terms of the deceased spouse’s will.  Often it may not be completely clear what property is separate and what is community property, an uncertainty which can lead to considerable tension between beneficiaries.

A surviving spouse also has the right to be the administrator of all community property.  This means that if a decedent has appointed someone else as the executor of his or her estate, the surviving spouse may nevertheless be appointed as the person having responsibility for management of all community assets during the probate proceedings.

The law also provides important distinctions in the authority a person has to manage separate and community property.  There are certain transactions regarding community property, particularly real estate conveyances, which require the signature of both spouses.  If an estate plan involves such a conveyance, the transfer might be jeopardized if both spouses don’t sign the conveyance.  This may result in unintended tax and other consequences.

Just as certain assets are either community or separate, certain debts and obligations are separate or community.  The distinction is very important in the context of probate administration, because certain assets may be protected from the claims of creditors depending on the characterization of the debts and assets.

The distinction between separate and community property is also very important in determining the distribution of assets when a person dies without having prepared a will.  In such cases, Washington statutes provide for different means of allocating separate and community property.  When a married person dies without a will, all of that person’s community property goes to the surviving spouse.  However, the decedent’s separate property would not go entirely to the surviving spouse if the decedent also had surviving children, parents or other family members.

It is possible to avoid probate proceedings altogether with respect to community property with an agreement known as a community property survivorship agreement.  Depending how it is drafted, such an agreement may also alter the characterization of property as either separate or community.  In its simplest form, a community property agreement can convert all property to community property and can provide that all of the property will belong to the surviving spouse upon the death of one of them.

While this may be a very appropriate agreement for some people, it can have disastrous consequences for others.  For example, the parties to a second marriage who are concerned about providing for their children from prior marriages would probably not want to sign such an agreement.  A community property agreement could also have the effect of unnecessarily increasing Federal Estate taxes.  A community property agreement is obviously a very important legal document and should only be signed after consulting with a qualified legal advisor who is able to explain all of the possible ramifications.