§ 5.01 Agreements as to the Character of Property

• Jurisdiction: Washington

§ 5.01 AGREEMENTS AS TO THE CHARACTER OF PROPERTY

The basic rules relating to characterization of property may be varied by agreement between prospective spouses (via prenuptial agreements) and spouses (via postnuptial agreements). Registered domestic partners may similarly vary property rights either before or after registration. Committed intimate partners can, and often do, alter and clarify their respective rights in property by agreement, and so the material in this chapter is applicable to those agreements by analogy.

Although they are not directly authorized by statute, prenuptial agreements have a derived statutory basis in the Statute of Frauds, RCW 19.36.010 (which only refers to agreements made in consideration of marriage and so does not include agreements between registered domestic partners), and a basis in contract law, and they have been recognized by courts. Postnuptial agreements have a derived statutory basis in RCW 26.16.050 and 26.16.120 and a basis in interpretive case law. See In re G.W.-F., 170 Wn. App. 631, 285 P.3d 208 (2012).

Postnuptial agreements may have one, two, or three "prongs," as analyzed by Professor Harry M. Cross in The Community Property Law in Washington (Revised 1985), 61 WASH. L. REV. 13, 101 (1986). The first prong contemplates the conversion of existing separate property into community property (or vice versa). The second prong contemplates the conversion of future-acquired separate property into community property (or vice versa), and the third prong, authorized by RCW 26.16.120, contemplates transfer upon the death of one spouse of all community property, normally to the surviving spouse.

Conveyance of a community interest in real property from one spouse to the other, making it the separate property of the grantee spouse, is authorized by RCW 26.16.050. The court in Volz v. Zang, 113 Wash. 378, 194 P. 409 (1920), concluded that the reverse (conversion of separate property into community property) could also be accomplished by agreement, although there is no statutory authorization to do so. These rules have been assumed by the court to apply to both personalty and realty, although the statute in question deals only with real property.

RCW 26.16.120 refers only to agreements between spouses (and registered domestic partners) concerning the "status or disposition" of community property, which agreement is to take effect upon the death of either. Such an agreement is generally characterized as a "statutory community property agreement." The types of spousal property agreements that courts have recognized, such as those converting existing or subsequently acquired separate property into community property, are generally referred to as "nonstatutory agreements." Statutory community property agreements are discussed in Chapter 4, § 4.17.

Agreements between spouses as to the character of existing and after-acquired property often will have tax consequences—some more obvious than others. The conversion of separate property to community property and vice versa will affect the tax treatment of income from such property. This is significant if the spouses file separate returns. Conversion of separate property to community property may also allow a couple to take advantage of a step up in basis for purposes of capital gains tax at the death of the first spouse, provided that the nondonor spouse lives for at least one year after the conversion occurs. See I.R.C. § 1014(e). See discussion in Chapter 7, § 7.02[19]. A conversion may also be a "disposition" of property with attendant tax consequences. For example, the conversion could be a taxable gift to a spouse, relevant if the donee spouse is not a U.S. citizen. See I.R.C. § 2523(i). The tax consequences of agreements between domestic partners are significantly more complicated than agreements between married persons. See Chapter 7, § 7.02[3], for a summary of the current status of tax treatment of the community property of registered domestic partners.

[1] Prenuptial Agreements

A prenuptial agreement "is one entered into by prospective spouses prior to marriage but in contemplation and in consideration thereof. By it, the property rights of one or both of the prospective spouses are determined or are secured to one or both of them or to their children." Friedlander v. Friedlander, 80 Wn.2d 293, 298-99, 494 P.2d 208 (1972).

The purpose of the prenuptial agreement may be frustrated not only because of the strict good-faith requirements placed upon such agreements by the court, but also because of the broad discretion the court has in the disposition of property in the event of a dissolution. The character of property, whether separate or community, does not control the court's distribution of it upon dissolution of the marriage. Beakley v. Beakley, 25 Wn.2d 228, 170 P.2d 314 (1946). A prenuptial agreement concerning such character would, of course, be persuasive as to the proper disposition of property in the event of dissolution, but like a property settlement agreement made in contemplation of dissolution, see Lee v. Lee, 27 Wn.2d 389, 178 P.2d 296 (1947), or a postnuptial statutory community property agreement, see In re Estate of Lyman, 82 Wn.2d 693, 512 P.2d 1093 (1973), approving and adopting 7 Wn. App. 945, 503 P.2d 1127 (1972), it may not be binding on the court. See In re Marriage of Matson, 107 Wn.2d 479, 488, 730 P.2d 668 (1986) (Pearson, J., dissenting).

The Court of Appeals implied in In re Marriage of Cohn, 18 Wn. App. 502, 569 P.2d 79 (1977), that a trial court should uphold prenuptial and other property settlement agreements voluntarily entered into by the parties, provided that the agreements meet the established legal tests discussed hereafter, despite a disparate division of property between the parties. In both Cohn and Friedlander, the courts found the agreements valid and upheld the property settlements and disposition based upon those agreements.

Practice Tip: Prenuptial agreements can serve the valuable purpose of clarifying, through the very process of reaching an agreement and reducing it to written form, the property interests of the parties, both as to existing property and that acquired subsequent to marriage. Indeed, the greatest utility of valid and enforceable prenuptial agreements is often that of preventing misunderstandings and resultant disputes.

The Statute of Frauds, RCW 19.36.010, requires "every agreement, promise, or undertaking made upon consideration of marriage, except mutual promises to marry," to "be in writing, and signed by the party to be charged therewith, or by some person thereunto by him or her lawfully authorized . . . ." The general standard for compliance with the Statute of Frauds is set forth in Coleman v. Saint Paul & Tacoma Lumber Co., 110 Wash. 259, 273, 188 P. 532 (1920), as follows: "By an unbroken line of decisions we have held that, to meet this statute, the writing evidencing the agreement must be so complete in itself as to make a resort to parol evidence to establish any material element of the agreement unnecessary."

The court in Friedlander, 80 Wn.2d 293, defined a prenuptial agreement as one being made "in contemplation and in consideration" of marriage. It seems possible, in view of the decision in Koontz v. Koontz, 83 Wash. 180, 145 P. 201 (1915), that a prenuptial agreement may be made in contemplation of marriage but not in consideration of it and, therefore, escape the writing requirement. However, the Washington courts have consistently struck down prenuptial agreements made without a written memorandum, without reference to whether the agreement was made in consideration of marriage. See Schlaadt v. Zimmerman, 206 F.2d 782 (9th Cir. 1953); Rogers v. Joughin, 152 Wash. 448, 277 P. 988 (1929); see also In re Estate of Burmeister, 124 Wn.2d 282, 877 P.2d 195 (1994). However, in Dewberry v. George, 115 Wn. App. 351, 62 P.3d 525, review denied, 150 Wn.2d 1006 (2003), an oral prenuptial agreement to keep property separate was enforced under the part performance exception to the Statute of Frauds because the parties observed the agreement during the marriage.

Practice Tip: It is axiomatic that attorneys should never advise clients that it is acceptable to enter into an oral prenuptial agreement. If a client comes in already married and outlines the terms of what he or she believes is an oral agreement, the agreement should be reduced to writing with all of the attendant requirements outlined in this chapter.

Few Washington cases have dealt expressly with the required form of prenuptial agreements. A deed prepared by a prospective wife for the signature of her prospective husband recited some of the details of an agreement between the parties, including the promise of the grantee to marry the grantor in consideration for the conveyance. This was held a sufficient memorandum, even though not signed by the grantee, as she herself had prepared it and, having received it, recorded it. Prignon v. Daussat, 4 Wash. 199, 29 P. 1046 (1892).

Practice Tip: Beyond the statutory requirement—that of a writing signed by the party to be charged—there are few clear-cut rules as to what sort of writing is sufficient. The contract should identify the specific items of existing property being included, with legal descriptions of real property, and recite their present ownership and intended disposition, and the estimated available values of the property if available and appropriate. The agreement itself should be acknowledged by both parties if it deals with real property. (If the property agreement provides for present conveyances of real property, it should be implemented by deeds.) Other implementing acts may be required as to property that must be transferred in a particular manner—for example, United States Savings Bonds, which are transferable only by a change of registration.

The cases of Hamlin v. Merlino, 44 Wn.2d 851, 272 P.2d 125...