If It’s Community Property – Why do I Need a Will?

On Behalf of | Apr 11, 2012 | Estate Planning |

Have you ever heard of “urban myths?” Those are the stories that we’ve all heard and believe to be true, that turn out to be false. Perhaps the most persistent myth in the area of estate planning is that community property passes automatically to the surviving spouse, so husbands and wives don’t really need Wills or Living Trusts. This myth is so engrained, that when I tell people it is untrue, many people simply do not believe me. Unfortunately, it leads many people to fail to set up their documents correctly and leads to the catastrophe of an unplanned or incorrectly planned estate. Remember, the law controls everything when someone dies, so you want to be sure your assumptions and your paperwork comply with it.
Community property is a difficult concept for lawyers to understand. When I served on the Board of Bar Examiners (the lawyers who write the bar exam that law school graduates must pass in order to obtain their license), I always had to work in a community property feature to each question. It was often the meanest trick in the question I prepared, because the implications are so complex. Nowhere is this more apparent than in estate planning. The main point here is this: community property does not mean the survivor gets everything automatically. At death, nothing is automatic. Married people still need a Will, a Revocable Living Trust or a Community Property Agreement to pass their estate to their spouse.
Let’s not get into the difficult issue of what property is “separate” and what property is “community”. I’ll just say that nearly every couple has a mix of both, and it is an important distinction. Let’s take Arlene and Walter, who have been married 59 years, and live in their own home, as our example. They have no previous marriages, and have always owned things together as husband and wife, and we’ll assume have an estate composed 100% of community property, but have never done any of those documents. Let’s say Walter dies and Arlene needs to sell the home. What she’ll find out is that Walter’s estate owns half of the home, and she owns half, so she probably will be unable to sell it. His half of the community property is controlled by his estate! Now, in fairness, the property in Walter’s estate will all ultimately belong to Arlene, but there will need to be a probate, or some formal proceeding to get Walter’s half of title out of his estate and into Arlene’s name so she can complete the sale. Should Arlene fail to do so, and just live in the home until she dies, then two estates will own the property (Walter’s and Arlene’s), and it gets more complicated yet for their survivors.
The good news is the solution is simple. Washington law allows spouses to sign a document known as a “Community Property Agreement”, which (among other important things not covered here) has the effect of conveying the deceased spouse’s half to the survivor very simply. In the right situation, these are wonderful documents to use, and we use them frequently. However, they only take care of that 1st step, and do nothing to transfer property to the next generation, so at the survivor’s death, they are useless. Further, if both spouse’s die at the same time (in an accident), they will not help. Finally, care needs to be taken especially in second marriages, since the property interests are far more complicated, and the implications of such Agreements have wide, unintended consequences far beyond this short post. Before you go out and do a “fill in the blank” community property agreement, you should talk to your lawyer to be sure it’s a good fit for you. The stakes are simply too high for guesswork. Here at Third Street, I usually prepare them together with a basic package of documents including a Will (to cover what happens when the survivor dies, or if both spouses die in the same accident), a financial and a medical power of attorney (to cover disability) and a living will – all at very modest expense – so you can have peace of mind knowing your spouse and family are provided for.