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A custody agreement is a legal document outlining the terms of a co-parenting relationship, detailing each parent's responsibilities and decision-making authority regarding a child. California courts generally favor joint custody, assuming that equal decision-making serves the child's best interests if both parents are deemed fit. The video discusses creating a parenting plan, which serves as a foundational document for custody agreements, specifying how parents will share custody, including scheduling and decision-making details. To aid in creating this plan, a fillable template is provided through a link. The video also introduces the custody process in California, starting with the initial steps.