global Tax What’s the Real Cost of Holding Cash? Tax Planning for Liquidity Events October 21, 2025 Did you just sell your business? Holding the cash might feel like the right move, but it could be an expensive mistake without the right planning. In this blog, we explore how to protect your money and save on taxes after a big payout. Holding onto cash without a concrete plan could cost more than you think. If you’ve recently sold your business or otherwise received a large payout, you will want to take steps to protect your money and save on taxes. Here are some tips to handle cash in a way that protects your wealth, keeps taxes in check and sets you up for success in the future. Quick Takeaways Holding cash after a liquidity event can lead to lost value from inflation, missed market opportunities, and higher taxes.Understanding how your payout is taxed is essential as capital gains, ordinary income, state taxes, and NIIT can all apply.Smart planning strategies include charitable giving, tax-advantaged investments, portfolio diversification, and liquidity planning.Taking action sooner rather than later is key to preserving wealth and minimizing taxes. Liquidity Events: Important Background InformationA liquidity event refers to any situation where a business or individual converts a large portion of their holdings into cash. Liquidity events can dramatically increase your cash holdings in a short period of time and often come with significant tax consequences.Some Common Examples of Liquidity EventsSelling a businessExercising and selling equity/stock optionsReceiving a large inheritance or other “windfall” (unexpected/sudden payout)Cashing out a private investment or real estate dealDivorce settlements or legal payoutsWhat Should You do After a Liquidity Event?It is tempting to “wait and see” before making big moves after a liquidity event, but keep in mind that sitting on large cash reserves can cause you to lose value and limit your long term financial growth. Watch out for these hidden costs:Inflation risk- High interest rates don’t always keep up with inflation, so your cash could be losing value while it remains idle.Missed investment opportunities- Markets fluctuate, so not taking action can mean missing out on meaningful returns.Tax inefficiencies- Waiting too long can mean missing key windows to offset gains, harvest losses, or reposition assets in a more tax-advantaged way. “A windfall can feel like a safety net, but if you’re not proactive, it can quietly become a liability. The smartest move is to turn short-term cash into long-term strategy.” - David M. Desmarais Understanding the Tax Structure of Your PayoutHow is your payout taxed? Well, that depends on a few components which are taxed differently.Capital gains- Selling appreciated assets like company stock or real estate, for example, usually triggers capital gains tax which may be short or long term depending on the holding period.Ordinary income- Certain payouts like bonuses or equity compensation can be taxed as ordinary income (often at a much higher rate).State taxes- Where you live can make a huge difference in how the payout is taxed. Some states have no income tax, while others may impose steep additional rates. “Massachusetts recently added a 4% surtax on income over $1 million, which catches a lot of business owners off guard after a liquidity event. Even if you don’t move, there are still planning tools that can help mitigate that extra layer of taxation.” - David M. Desmarais Net investment income tax (NIIT)- Once you cross certain income thresholds, you may owe a 3.8% surtax on passive investment income.4 Tax-Smart Moves to Consider After a Liquidity EventIn addition to working with a tax advisor, it is wise to:Think about charitable giving- Utilizing donor advised funds (DAFs), charitable trusts or direct donations of appreciated assets can provide meaningful tax savings (and help you meet your charitable goals).Explore investment structures- There are a number of tax efficient investment structures including municipal bonds, opportunity zones, life insurance or annuities and family trusts.Make sure your portfolio is diversified- You don’t want to rush into investments but also don’t want to sit in cash forever either. Making sure your portfolio is tailored to your risk tolerance and goals can help preserve wealth over time.Plan for liquidity needs- Set aside enough to cover your short term needs and peace of mind, but be mindful of excess cash as it could drag down your overall return.FAQs: Tax Planning for Liquidity EventsHow long should I wait before investing after a liquidity event? You don’t need to rush, but it’s often wise to set aside cash for immediate needs and begin deploying the rest gradually with guidance from a financial advisor.Is it better to give to charity in the same year as the liquidity event? Oftentimes, yes. Charitable giving in the same tax year can help offset a large income spike, reducing your tax liability.What if I live in a high-tax state? Your location plays a major role in tax outcomes. Consider strategies like partial domicile relocation or income deferral to help mitigate state-level taxes. Without a well structured plan, holding cash after liquidity can lead to lost investment growth, missed tax opportunities and delays in achieving your long term goals.
