Uncalled capital, transfer restrictions and liquidity pressures can leave heirs with obligations they are unprepared to meet
Families transferring portfolios built over decades around private equity, private credit and real assets face challenges that extend well beyond estate planning.
While the wealth creator may have been comfortable with long lockup periods and limited access to capital, the next generation may inherit investments that are difficult to sell, expensive to maintain and poorly aligned with their financial needs.
For Lynne Kostakis, Executive Director of Alternative Investments for Wealth Management at Northern Trust, the starting point should be understanding what it means to become an owner of these assets.
“Our first conversation is about stewardship. Before anything changes hands, heirs need to understand what they'd be taking on as owners. They may have to contribute more cash, will have few options to sell and may wait years for distributions that don't line up with their needs,” Kostakis told InvestmentNews.
“We have conversations with the wealth creator and with each heir since their questions and cash needs will differ. I encourage advisors to start with a complete list of every investment, organized by individual and entity, showing the amount committed, what remains to be called, and the role each holding plays, whether growth or income for example.”
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The challenge of generational differences
Private holdings lack the market prices and exit options of public investments, Kostakis said.
“Many stay illiquid for a period of up to 10 to 15 years with periodic distributions after the investment period, and even funds described as ‘semi-liquid’ typically cap redemptions at around 5% of the fund each quarter.”
One particular danger is uncalled capital, which can be overlooked because it does not appear in an investment statement's balance.
“Advisors sometimes overlook uncalled capital because it doesn't show up in a statement balance. If a family has invested only $400,000 of a $1 million commitment in the first year, the manager can still call the remaining $600,000 during the investment period, and an heir who receives that interest takes on the obligation,” she said. “Advisors should know where that $600,000 will come from before the transfer, not after the first call.”
The financial circumstances of the next generation can look very different from those of the original investor. A wealth creator in their 60s may have sufficient liquid assets to accommodate lengthy investment horizons, while a 35-year-old heir could be financing a home, raising a family or establishing a business.
“Liquidity needs differ for each heir, so I'd assess them individually. The lockups a wealth creator accepted may not suit the next generation, and siblings can have very different cash needs. I compare each heir's expected spending with the investment's lockup and the capital still to be called,” Kostakis said.
“An heir paying for education or buying property may need cash long before a private investment starts making distributions. While heirs typically are earlier in their lives with a potential longer asset growth runway than the original investor, they often are in a ‘life building’ phase of their live that requires more spending and expenses.”
Heirs' capital requirements
Inheriting a substantial private investment portfolio does not necessarily mean having the liquidity to support it.
“Say an heir plans to purchase a home and inherits an interest with $600,000 still to be called. I'd check whether that heir has enough liquid assets for the home, cover everyday expenses and meet capital calls. I wouldn't count on distributions arriving in time.
“If cash falls short, families can build liquidity elsewhere, adjust the pace of new commitments, or divide assets equitably rather than equally. I'd revisit the plan after a marriage, a new child, a business launch or a change in income.”
That distinction between equitable and equal distribution is important where siblings have different financial circumstances. An equal division of investments may not be equitable if one heir has less capacity to meet future commitments.
There is also a structural dimension that can be overlooked when families concentrate primarily on tax and estate planning. An investment may not necessarily be transferable to the intended beneficiary.
“Yes, and advisors often underestimate it. Even with a carefully prepared tax and estate plan, a private investment may not pass to the intended heir because of eligibility requirements or transfer restrictions. I tell advisors to check those terms before the family invests, well before a transfer is on the table,” Kostakis said.
“I'd start with the fund's governing documents, looking at transfer provisions, manager consent requirements, investor-qualification standards such as Qualified Purchaser, and whether the transferee assumes unfunded commitments. An heir doesn't automatically qualify just because the original investor did.
“If the transfer can't go ahead, the family may need a different ownership structure, keep the estate open until the investment liquidates, or sell the interest on the secondary market, often at a discount. I'd also bring in the estate attorney and CPA early.”
Capital calls present another risk because heirs cannot simply walk away from contractual obligations.
“An heir who can't meet one can't just walk away. Depending on the fund's documents, a default can mean losing contributed capital and unrealized gains,” Kostakis said. “The terms vary, so advisors should read the default remedies before the family commits, since the first missed call is too late.”
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Investment allocations
Even where ownership can be transferred successfully, the allocation to alternatives may need to change. A younger heir might have a longer investment horizon, but that does not automatically justify maintaining the previous generation's exposure.
“Age alone shouldn't drive the allocation. A 35-year-old may have decades to invest and still face large near-term expenses. I look at the heir's liquid assets outside the inherited portfolio, unfunded commitments relative to liquid net worth, spending needs, risk tolerance and experience with private markets,” she said.
“An heir with limited liquid assets may warrant a smaller allocation, while one who can comfortably cover spending and future capital calls may keep the existing mix. Either way, I'd let the heir's own financial plan set the future allocation, not the prior generation's portfolio.”
Ultimately, families risk making a fundamental mistake by deciding who should inherit an investment before establishing whether that person can realistically own and maintain it.
“The most common mistake I see is families choosing who will inherit an investment before testing whether that person can hold it. The intended heir may not be eligible to receive it. Even if they are, they need enough cash to meet the remaining commitment and the patience to leave the money tied up,” Kostakis said.
“Getting it right starts when the family first considers the investment, long before a transfer is near. I'd ask who may eventually own it and how they'll meet its obligations, and I'd revisit the answers as heirs' circumstances change,” she concluded.
