You just had a liquidity event. Maybe you’ve sold a business, or you’ve received a large gift or inheritance. Everybody has dreams about what they’d do in this situation – buy a new home, travel, invest – but what do you do when the money shows up in your account? Here are some things to think about as you prepare a longer-term plan for your new-found wealth. While we focus in this article on business sales, the same concepts hold true for any large, somewhat unanticipated inflow of cash. No matter what your situation, we encourage you to work with a professional advisor.

First steps

Make sure you have an account at an institution you trust to hold the assets you will receive from the liquidity event. Know the wire instructions to have the proceeds wired directly to the account.

Gift and estate tax planning around a liquidity event

If you are planning to make gifts to children or other beneficiaries, under some circumstances, doing so before the liquidity event and giving away a portion of your private business interest may allow you to take advantage of valuation discounts for gift tax purposes (which otherwise may not be available if you make gifts of cash post-event). Consult your estate-planning attorney, accountant and J.P. Morgan professional if you are interested in gift and estate tax planning around your liquidity event.

Take your time

If you have sold a business, you may have been able to live off of – and fund your family’s lifestyle from – your salary or profits from the business. Now you may have to fund those expenses from your portfolio. At the same time, you need to think about how you would like to spend your time – will you travel? Spend time with family? Take on other jobs (e.g., join one or more boards of directors, teach, etc.)? Continue to work for the business?

Part of your decision about long-term investing will depend on your spending and on how much of that spending you need to fund from your portfolio or other income you may have (including employment income) – and you may not know what your spending habits in this new phase of your life will be.

The most important thing to remember is that there is no urgency to put an investment plan – or a gifting plan – in place right away. While you may miss an immediate opportunity, at least on the investment front, others will present themselves, especially when you invest for the long-term.

Although this is less true with opportunities to purchase unique assets (e.g., certain real estate or collectibles), you should not rush into anything. Believe it or not, it is our experience that clients who receive significant liquidity quickly are best off when they take some time to get used to having liquid net worth (as opposed to having a business, which is “only” paper net worth). Get used to having a significantly sized account without feeling the need to “do something.”

Gauge your risk tolerance

What is your approach to investment risk? Asset allocation can be the most significant factor in the variability of long-term performance – sometimes even more so than security selection or market timing. Your risk tolerance – and your cash needs in the short-, medium- and long-terms – will drive an appropriate mix of assets for your investment portfolio.

Know your short-term needs

Make sure you have enough cash and other short-term investments to enable you to pay tax on your proceeds (if any), to fund any pre-planned purchases (family travel, second home, etc.), or to purchase medical insurance (if you are no longer covered by your business’s insurance). There will also likely be unexpected expenses for which you haven’t budgeted – make sure you have enough in your “day-to-day” accounts to cover unforeseen circumstances.

Considering both your liquidity needs and time horizon, the figure on the right lays out investment considerations for different liquidity “buckets.”

Liquidity needs and time horizons

Group cash balances into three types based on your liquidity needs and time horizon.

Day-to-day Balances

• 0-9 Months
  • Cash typically used for daily needs; may be subject to unforeseen expenses
  • Requires preservation of principal
  • Same-day liquidity

Reserve Liquidity

• 9-18 Months
  • Fairly static; same-day access not reached
  • Cash set aside for possible investments, large purchases

Investable assets

• 18+ Months
  • No short-term forecasted use

Create appropriate estate planning structures

Work with your estate-planning attorney to determine and create appropriate structures for yourself and your family to help hold, manage, protect and transfer your new wealth. These can include wills, trusts, limited partnerships or LLCs, and other planning vehicles. If you are charitably inclined, you can also create a private foundation or donor-advised fund, which can fulfill not only family and personal goals, but also tax and financial ones, both before and after your liquidity event.

Talk to a J.P. Morgan professional about planning around your liquidity event and about a longer-term investment plan.