.png?width=1080&height=1080&name=LinkedIn%20with%20Light%20Blue%20Background%20(1).png)
.png?width=1080&height=1080&name=Facebook%20with%20Light%20Blue%20Background%20(1).png)
.png?width=1080&height=1080&name=Instagram%20(1).png)
EP Wealth’s Colton Peck, CFP®, discusses how liquidity planning can help high-net-worth families manage cash flow, investment opportunities, and long-term financial goals.
The Importance of Liquidity in Financial Planning for High-Net-Worth Families
Liquidity can be an essential but sometimes overlooked component of financial planning, especially for high-net-worth (HNW) families. While these families typically have substantial assets, a significant portion of their wealth may be tied up in businesses, real estate, or private investments, making it more difficult to access cash when needed.
Some of the most common liquidity challenges for HNW families include:
- Wealth concentration in illiquid assets, such as real estate or private equity.
- Owning and operating a business, where financial resources may be prioritized for business growth.
- Planning for gift and estate taxes, which may require significant cash reserves.
- Funding for philanthropy, particularly when structuring charitable donations.
- Complex family dynamics, where multiple generations and different financial priorities must be managed.
Throughout this blog, I’ll explore how liquidity planning can play a role in balancing the goal of long-term growth and cash flow needs for HNW families.
What Is Liquidity?
Liquidity refers to how quickly an asset can be converted to cash without significantly affecting its value. Common liquid assets include:
On the other hand, illiquid assets—such as private businesses, real estate, and private equity—may take months or even years to convert to cash, and a rushed sale may decrease the price the asset could be sold for.
Determining the Right Liquidity Ratio for a High-Net-Worth Family
There is no one-size-fits-all approach to liquidity planning. Every HNW family has different cash flow needs, asset allocation, and income sources, all of which should be considered when determining how much liquidity is appropriate.
Some factors to consider:
- Cash flow requirements – How much liquidity is needed to cover ongoing expenses, travel, debt payments, or unexpected costs?
- Asset allocation and risk tolerance – A portfolio with significant illiquid assets (such as private real estate or business interests) may require a higher liquidity buffer to meet cash needs without forcing asset sales.
- Income-generating investments – If a portfolio generates predictable income, the family may require less liquidity than a portfolio focused primarily on growth assets.
Given these complexities, liquidity planning should be reviewed regularly in coordination with financial advisors, tax professionals, and estate attorneys. Major life events, changes in financial markets, and evolving family goals may all warrant adjustments.
The Hidden Costs of Too Much or Too Little Liquidity
Finding the right balance of liquidity is key—having too little or too much liquidity can each present challenges.
Risks of Insufficient Liquidity
- Forced asset sales – A lack of liquidity may require selling real estate, business holdings, or highly appreciated assets, which can result in significant tax consequences.
- Estate and business succession complications – Without proper liquidity, a family may struggle to cover estate taxes or smoothly transition ownership of a business.
Risks of Excess Liquidity
- Opportunity cost – Holding too much cash or low-yield assets may mean missing out on higher-return opportunities in equities, private investments, or other asset classes.
- Loss of purchasing power – If liquid assets are returning less than inflation, the real value of the family’s wealth may erode over time.
Striking the right balance can help families address short-term cash needs while keeping long-term investment potential in mind.
Balancing Liquidity Needs with Long-Term Wealth Strategies
HNW families typically aim to integrate liquidity management into a broader wealth-building strategy.
Considerations for Liquidity Planning
- Cash flow needs – Plan for lifestyle expenses, philanthropy, taxes, and a buffer for unexpected events.
- Strategic liquidity for investment opportunities – Some families maintain liquidity to fund opportunistic investments, such as private equity deals or real estate acquisitions.
- Diversification across liquid and illiquid assets – A well-balanced portfolio combines stocks, bonds, real estate, and private investments to align growth with flexibility.
- Legacy planning – For families focused on transferring wealth to heirs or engaging in philanthropy, certain assets may be earmarked for these purposes and excluded from liquidity calculations.
Using Lines of Credit in Liquidity Planning
Lines of credit can serve as a flexible liquidity tool for HNW families, particularly for those who own significant assets but prefer not to sell them.
Ways HNW Families Use Lines of Credit
- Accessing liquidity without selling assets – A line of credit allows families to borrow against investments, real estate, or other holdings to meet cash needs.
- Bridging liquidity gaps – Some families use a line of credit as a short-term loan, such as financing a new real estate purchase while waiting for another property to sell.
- Potential tax advantages – In some cases, interest payments may be tax-deductible, depending on the type of borrowing and asset backing the loan.
Liquidity Planning for Business-Owning Families
Families that own a business may need to consider unique factors when developing a liquidity plan. Many business owners choose to reinvest in their company rather than drawing excess funds, which can help fuel growth but may also limit personal liquidity if too much wealth remains tied to the business.
To maintain financial flexibility, owners may explore various liquidity options, such as taking dividends, making distributions, adjusting their salary, or securing a business loan.
Business owners should seek to strike a careful balance—taking too much liquidity from a business may limit its growth, while leaving too much within the company can create personal financial strain.
Creating Liquidity from Illiquid Assets
For HNW families, liquidity can be generated from assets that are not traditionally liquid. Some common strategies include:
- Using debt or lines of credit to borrow against real estate, investments, or business holdings.
- Selling all or a portion of an asset to create liquidity.
- Structuring advanced estate planning techniques, such as sales to irrevocable trusts or family holding companies.
- Entering into sale-leaseback agreements to unlock capital while maintaining control of assets.
Each of these options carries legal, tax, and financial implications, so families should consult with their financial and legal professionals before making decisions.
Adjusting Liquidity Strategies Across Life Stages
Liquidity needs evolve over time. As wealth grows, priorities shift, requiring different approaches to liquidity management.
Early Wealth Accumulation
In the early stages of building wealth, families typically focus on building assets and saving for major expenses, such as education, home purchases, or business ventures.
Wealth Growth Stage
As wealth increases, families may expand their investments into real estate, private equity, and business ventures, often requiring more sophisticated borrowing techniques and leading to a higher concentration of illiquid assets.
Wealth Preservation Stage
At the wealth preservation stage, the focus shifts to funding retirement and structuring the transfer of assets to future generations through various estate planning techniques.
Wealth Distribution Stage
In the final stage, financial priorities revolve around wealth transfer, estate taxes, and philanthropy, with increased liquidity planning for gifting or selling assets.
For HNW families, liquidity planning is about more than just cash flow—it can be a key part of maintaining financial flexibility while developing long-term growth strategies.
To learn more about how we might help you develop a liquidity strategy that supports your financial goals, contact an EP Wealth advisor today.
DISCLOSURES:
- EP Wealth Advisors, LLC. is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability.
- Request an appointment with an EP Wealth Advisor when you have a minimum of $500,000 in investable assets – which includes qualified retirement plans (IRA, Roth IRA, 401(k), taxable brokerage, cash (savings / checking) and CDs. Investable assets do not include your home, vehicles, or collectibles.
- Hiring a qualified advisor and/or financial planner does not guarantee investment success, and does not ensure that a client or prospective client will experience a higher level of performance or results. No guaranty or warranty is made that any direct or implied results or projections being represented here will be met or sustained.
- Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions. Content does not involve the rendering of personalized investment advice nor is it intended to supplement professional individualized advice.
- EP Wealth Advisors (“EPWA”) makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented. All expressions of option are subject to change without notice.
