What is a Community Property Agreement and How Does it Interact with My Trust?

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I Need to Know What a Community Property Agreement is

A Community Property Agreement is a contract that a married couple in a community property state sign as a couple that specifies how they want their property to be classified. Classification may be as community property or separate property, or a mix of the two.

What Is A Community Property State?

In a community property state, all of the marital assets are jointly owned, so they must be jointly split in the event of a divorce. Some examples of this include:

  • Real estate
  • Personal property
  • Savings
  • Retirement accounts
  • Debts acquired during the marriage

This is largely the result of the Uniform Marital Property Act of 1983. This act defined the ownership of property in a marriage and outlined how these assets would be separated in the event of a divorce. One of the most notable things that resulted from the Uniform Marital Property Act was a new class of property that belonged to the marriage, not any particular individual. So, if there was ever any doubt about who a piece of property belonged to, it now was considered general marital property.

However, there are a few instances when a property is considered individual property. Primarily when the property was acquired before the marriage or was inherited by one spouse before or during the marriage. But if you live in a community property state and buy a home while married, even if you purchase it without your spouse, it’s considered community property. Despite the 1983 act, common property is not a popular concept in the U.S As of 2021, community property law is only required in nine states.

If you live in one of the ten community property states, your state law may allow for a community property agreement. This is an agreement between spouses that acknowledges that all assets are community property. In addition, it stipulates that in the event of the death of one of the spouses, all of the assets are immediately transferred to the surviving spouse. Illinois is not a community property state, so the marital property laws do not apply when a spouse dies (only for divorce). Each spouse is considered to own the assets that are titled in his or her name.

Some practitioners use this agreement in lieu of other planning for spouses in community property states. Be careful when entering into more sophisticated estate planning such as trusts planning, that you make your estate planning team aware of any previous community property agreements. A previously signed community property agreement could negate the effectiveness and planning benefits of that trust planning by passing everything to the surviving spouse outright, thereby causing the trust to be unfunded.

Historically, the nine community property states have been: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In 1998, Alaska passed the Alaska Community Property Act which allows a married couple to elect for all or part of their property to be treated as community property.