How Much Cash Should Be Reserved for Taxes, Spending, and Commitments?

Set cash reserves by matching them to the family's obligations and the dates those obligations come due. A single cash target can obscure whether the money will be there when you need it. Start by listing taxes, family spending, planned gifts, operating costs, and investment commitments, then group each item by timing and certainty.

Map the Obligations

Separate near-term needs from intermediate and long-term goals. The Family Office Book describes short-term liabilities such as keeping the family going and educating children, intermediate goals such as funding charities or other plans after a liquidity event, and long-term goals such as endowing a museum. Each stream has a different horizon, so each can support a different level of volatility and illiquidity.

For each obligation, record the expected amount, due date, and confidence in the estimate. Include capital calls and any spending that could rise if family circumstances change. A family's cash needs can shift with events such as a divorce, death, child, or expensive new interest. The plan needs a regular review so the reserve reflects the family's actual commitments. For a broader structure, see planning investments around tax payments.

Match Assets to Timing

Keep assets for near-term obligations readily accessible and avoid relying on an asset that may need to be sold at a discount or cannot be redeemed on time. For intermediate needs, consider the date the funds are likely to be required and whether the asset can be converted to cash before then. Longer-term capital may have more room to tolerate illiquidity, provided that doing so does not put nearer obligations at risk.

This is an asset-liability matching exercise. First determine what the family needs to spend and when, then choose assets for each time horizon. The remaining capital can be invested according to the family's longer-term objectives. I find this keeps cash decisions tied to real needs instead of treating all capital as if it had the same purpose. The capital call and liquidity planner can help organize expected calls and available funds.

Give Cash a Clear Job

Decide which balances are true reserves and which are investments intended to produce income. An asset that offers a higher yield may carry risks that do not fit the reserve's purpose. If the family moves money out of cash into a higher-risk holding, make that choice explicit in the allocation and do not count it as immediately available for obligations.

Review the reserve when the family's spending needs, tax obligations, or investment commitments change. A shared view of accounts, entities, and upcoming payments helps the family avoid duplicate reserves in one area and shortfalls in another. Talk with your CPA about tax timing and with your attorney about legal obligations. For a wider framework that connects time horizons to portfolio choices, see portfolio models and planning liquidity across investment horizons.

They had different horizons and because of that they can accept the various levels of illiquidity and volatility matched to the time horizon.

Sources: The Family Office Book. Informational only, not financial, legal or tax advice.