Current Arrangements and Documents

While you may want to write on a clean slate when constructing your plan for building wealth and passing it along to your chosen heirs, you must consider the impact that existing legal documents and arrangements may have on your plans.

Some of these arrangements may be changed easily, such as most wills and trusts. Others, such as contracts and marriage dissolution agreements, may be difficult or impossible to amend. Still others, such as variable annuities or mortgages, can be changed if you're willing to pay some kind of penalty or fee.

Your existing legal arrangements can affect your current and future financial position in several ways. Some of these arrangements have their primary impact on your current cash flow situation. If a current legal obligation, such as a mortgage, requires you to pay out money, you'll have to keep paying this amount until the obligation is satisfied. Thus, you will have less money to use for other purposes. Other legal arrangements, such as wills and trusts, may affect primarily how you will dispose of your wealth at death.

Your first task is to locate and organize any documents and other evidence of your legal obligations and relationships. Once you have done this, you'll need to make sure that you account for these arrangements wherever they would be relevant to your wealth-building and wealth-distributing (at your death) plans.

For example, after you take a look at your legal obligations and arrangements, do you have to amend your personal budget to reflect money that you have to pay out, or will receive? Or, do decisions that you have made regarding the form of legal ownership of property (such as joint ownership, or choice of legal entity of your business) have an impact on how you can transfer wealth to your chosen heirs during your lifetime, or at your death?

Here is a list of some of the items you should scrutinize:

• Marriage dissolution agreements: alimony, property settlements, pre-nuptial agreements and child-support agreements fall within this category. Whether you receive such payments, or are the one required to make them, they will have to be factored into financial and estate plans.
• Business organization documents and materials: how you have organized your business from a legal standpoint (sole proprietorship, partnership, limited liability company or corporation) will impact on your exposure to legal liability, how your business is taxed, and several issues relating to constructing a financial and estate plan.
• Business transfer/continuation agreements and plans: any documents pertaining to your plans and agreements aimed at continuing or disposing of your business (including insurance policies to implement such plans) should be located. Unless you have made reasonably detailed plans to continue your business at your death or disability, and also have a workable plan to fund them — whether by insurance or an accumulated side fund — as a practical matter it is extremely unlikely that your business will survive as a going concern.
• Contracts: Contracts (including those that may require a continuing monetary outlay by you, and those that may provide you with an income source) can be expected to affect your current personal cash-flow situation. If the contracts are large, and of long duration, they may also have to be factored into your plans for passing on your wealth to your chosen heirs.
• Wills and trusts: Having these documents available will be necessary when you begin work on putting together a plan to dispose of your wealth to your chosen heirs at your death.
• Joint ownership property: Property that is jointly owned and held as a joint tenancy or as a tenancy in common. Knowing which of these forms of joint ownership applies to each piece of property you own is important for planning your estate.
• History of making large gifts: If you have made any gifts of money or property worth more than the amount of the annual exclusion ($14,000 in 2013; $13,000 in 2012) to individuals, or have made large charitable gifts, you'll want to collect records of these gifts (including any federal gift tax returns you filed). This information will be needed by you — or your advisors — to create your estate plan.

What about oral contracts? Business owners frequently deal with contracts and other legal obligations (such as leases and purchase orders), both in their business and in their personal dealings. Usually these obligations are evidenced by a written document. But what about oral contracts? Are they only worth the paper they're not written on, or can they be legally enforceable?

The short answer is that if all of the legal requirements for a valid contract are met, an oral contract can be legally enforceable. However — and this is a big however — the legal rules that govern oral contracts strictly limit the monetary obligation (often $500) that will be enforced under an oral contract, and the type of property that can be exchanged under an oral contract. The exact rules that will apply depend in large part on your state's law on this issue. Accordingly, if you are concerned that you may have knowingly or unknowingly created legal obligations by way of an oral arrangement, it's best to consult an attorney.