Managing Illiquid Assets: Integrating Real Estate and Private Holdings into Your Plan

By Jim Davis, CFP®

For most wealthy families and individuals, it’s not unusual for the portfolio to include not only cash, stocks, bonds, and other listed securities, but also real estate, business holdings and limited partnerships, private equity, and other types of less-liquid property. We wrote recently, in fact, about some of the considerations of holding such illiquid assets, often referred to as “alternate investments.” One of the topics we mentioned in that previous article was the importance of considering the role of illiquid assets in the context of the total financial plan.

In this article, we’d like to delve a bit deeper into some of the strategies and best practices for managing illiquid assets in the context of a balanced, diversified financial plan. There are many advantages to holding such assets as part of a wealth diversification strategy, but there are some caveats that apply, also.

Advantages of Less-Liquid Assets

One of the principal advantages of holding illiquid assets is their typical lack of correlation with listed equities and debt. This attribute can make them an ideal hedge against financial market price movements and their more direct effect on stocks and bonds. For example, when inflation is on the rise, the value of fixed-income holdings will usually fall, since investors can buy new fixed income securities that pay higher coupon rates; therefore, the fixed income securities already owned will be worth less and their prices will go down. On the other hand, most real estate rental properties reprice on a regular basis when their leases expire. If inflation goes up, then they will be able to increase their rental prices; so, investor returns will generally rise at close to the rate of inflation. Further, seasoned real estate investors have known for a long time that the tax code offers many opportunities. For example, the depreciation allowance can permit an investor to offset some or all of the revenue from an income-producing property: in effect, creating a tax-efficient or even tax-shielded income stream. Also, it is possible to avoid or delay the tax consequences of selling a property at a profit by re-investing the proceeds in a similar property of equal or greater value by means of a 1035 exchange. And there are other tax advantages available to those who invest in real estate.

Mapping Liquidity Needs

On the other hand, real estate and other alternative investments tend to “soak up” their owners’ liquid reserves. Thus, one of the principal considerations with managing illiquid assets is, not surprisingly, ensuring adequate overall liquidity and avoiding the need to sell at undesirable times. So, a balanced and comprehensive financial plan should involve taking careful stock of short- and medium-term liquidity needs to make an accurate evaluation of how much of the portfolio should be maintained in more liquid assets to cover needs. Certainly, if the real estate portfolio includes income-producing properties, that income stream becomes part of the calculation; some portion may be needed for day-to-day needs, while some could potentially be allocated to longer-term investment, depending on the needs of the owner and what operates to the best advantage of the portfolio.

The larger the portfolio and the more diversified it is, the larger the proportion that can be allocated to less-liquid holdings. However, proper planning should include maintaining sufficient assets that produce income to cover the owners’ needs. Such assets may include cash, interest-bearing securities like bonds, bond funds, and bank deposits, and even equities with secure dividend payments. In fact, such equities have the additional advantage of offering the potential for long-term appreciation as both a hedge against inflation and an engine for wealth generation.

Planning for Growth and Diversification

High-net-worth clients may often have private-equity, peer-to-peer lending, business ownership interests, and other illiquid assets as part of the family business enterprise. Such assets, when held in appropriate proportion to the overall portfolio, may allow for longer-term wealth-building. Also, because of the low-correlation considerations mentioned above, they may serve as a valuable hedge against temporary adverse price movements in assets like listed securities. However, it is important, as part of a balanced financial plan, to periodically and systematically review these holdings and even to rebalance from time to time in order to maintain the most advantageous asset mix. A professional, fiduciary wealth planner can aid the owner by “stress-testing” the asset mix, performing projections to evaluate how the overall portfolio might be expected to perform under various financial and economic scenarios.

Integrating Illiquid Assets into a Coordinated Wealth Framework

For affluent families, the challenge is often not simply owning illiquid assets, but integrating them into a cohesive, decision-ready framework that aligns with broader planning objectives. This includes coordinating investment strategy with tax planning, estate structures, and risk management considerations. For example, concentrated positions in a family business or real estate portfolio may warrant complementary allocations in liquid markets to manage overall portfolio volatility and funding flexibility. Similarly, aligning entity structures, trust ownership, and gifting strategies with the anticipated lifecycle of illiquid holdings can enhance tax efficiency and generational transfer outcomes. A comprehensive approach also involves ongoing valuation, governance, and succession planning – particularly for closely held businesses – so that these assets remain an asset to the family, rather than a source of complexity or conflict. When managed deliberately, illiquid assets can serve not only as return drivers, but as strategic anchors in a multi-generational financial plan.

Estate Planning and Less-Liquid Assets

The role of illiquid assets in estate planning strategy is also important. It is not unusual for such assets to be highly appreciated, long-term holdings that may form a significant part of “legacy assets” to be passed on to future generations or for funding philanthropic goals. Proper use of trusts or even private foundations may afford tax-efficient methods for transferring the wealth represented by these assets.

Aspen Wealth Management is dedicated to serving as “chief financial officer” for those building multi-generational financial legacies. By working with our clients to develop and implement bespoke financial blueprints for monitoring illiquid assets in the context of the overall plan, we can take much of the day-to-day worry off their hands, allowing them to concentrate on their most important values and long-term goals. Can we help you gain more control and have less on your financial to-do list? Give us a call.

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