Community and Separate Property: The Basics
By Greer Gibson Bacon, CFP®
Since Washington is a community property state, it’s not surprising many of us own community and separate property. For estate planning and asset protection purposes, it’s important to understand what they are and how you might use them to your advantage.
What about domestic partners?
Under Washington’s community property rules, spouses and registered domestic partners are treated as one and the same.
A community property state assumes all assets acquired by spouses during marriage is the fruit of their “community” effort even if only one spouse earns income. Accordingly, each is deemed to own an undivided one-half interest in their community income and assets.
Most community property states give spouses equal rights and responsibilities in managing community property. For example, in Washington, you cannot gift community property to a third party without the consent of your spouse. That said; most debts incurred during marriage are owed by both spouses even if only one spouse incurred them.
For estate planning purposes, community property has a major advantage over other forms of ownership. Specifically, when the first spouse dies, both halves of the community property receive a “step-up” in cost basis. This can result in big income tax savings for a surviving spouse who sells his or her interest in the community property.
In a community property state, spouses can own separate property, too. It includes assets acquired before marriage, or after legal separation or divorce. It includes assets acquired by gift or inheritance. Also, it includes assets acquired using separate property or income derived from separate property as consideration. Debts (like student loans) can be separate, too.
Unlike community property, spouses have exclusive rights and responsibilities in managing separate property. For example, you can give separate property to a third party without the consent of your spouse. And generally speaking, one spouse’s separate property is not subject to the debts of (or tort claims against) the other spouse.
For asset protection purposes, it’s often desirable as a means of protecting one spouse’s separate property from the other spouse’s creditors especially if that spouse is engaged in a “higher risk” profession or business. Similarly, if a marriage is very stable and there’s no separate property, it may (or may not) be desirable to create separate property by formally transferring property to the “lower risk” spouse.
When community and separate property are commingled so it’s impossible to determine which is which, the property is treated as community property. So, if you don’t want them to lose their character, it’s important to keep track of accurate records. You can do this using account statements; purchase, sale, deposit and withdrawal records; and similar documents.
If you’d like to learn more about community and separate property or how you should manage yours, contact your estate planning or financial professional who is experienced in this area.
This article first appeared in the August/September 2017 Spokane County Medical Society Magazine. The information referenced in the article is current as of date of publication.