When the Gate Outlives the Investor: What Happens to Illiquid Investments When an Estate Is Settled?

In late May, we wrote about liquidity across the four structures that commonly deliver private market investments to clients: capital call funds, evergreen funds, interval funds, and 1940 Act mutual funds.

That article struck a chord.

Several people reached out to say it helped clarify why these vehicles behave so differently from traditional stocks, bonds, and mutual funds. One question then came up repeatedly:

This helps me understand liquidity during my lifetime, but what happens if I pass away? How does my estate get access to these investments, and how are they distributed to my heirs?

It is an excellent question, and it deserves a serious answer.

Most people assume death creates liquidity. In private markets, that is usually not the case. Death is not a master key that opens every gate. In most cases, the estate inherits the position, not an exit.

The same lockups, redemption windows, transfer restrictions, manager discretion, side pockets, and unfunded capital commitments that applied during the investor’s lifetime generally continue after death. The only difference is that the executor, trustee, spouse, or beneficiaries now have to deal with them.

That is why the liquidity conversation and the estate planning conversation belong together.

The First Principle: The Estate Inherits the Position, Not an Exit

When an investor dies, a private fund interest is generally not liquidated automatically. It passes to the estate, trust, surviving spouse, IRA beneficiary, or other designated recipient, depending on how the asset is titled.

But the investment still lives inside the same structure.

A lockup with two years remaining still has two years remaining. A quarterly redemption window that was oversubscribed is still oversubscribed. A manager who had the right to gate withdrawals during life generally still has that right after death. A capital call fund with unfunded commitments may still be able to require those commitments from the estate.

This is where families can be surprised.

They may open the statement and see a valuable asset. But the estate may need cash for taxes, expenses, equalization among heirs, or general administration. The investment may have value, but not immediate liquidity.

That mismatch between estate timelines and private fund timelines is the central issue.

Title, Beneficiary Designation, and Ownership Matter

Before we even get to the fund structure, the first question is:

How is the investment owned?

An alternative investment may be owned individually, jointly, in a revocable trust, inside an IRA, through an LLC, or in another estate planning structure. That ownership determines who has legal authority to act after death.

If the investment is owned in a revocable living trust, the successor trustee may be able to step in without probate. If it is owned individually, the executor or personal representative may need authority from the probate court. If it is held inside an IRA, inherited IRA rules apply. If it is owned through an LLC or other entity, both the entity documents and the fund documents matter.

This is why investment planning and estate planning cannot be separated. The legal wrapper around the asset often determines how smoothly the family can act when liquidity is most needed.

The Tax Side Is Often Favorable, But It Does Not Create Cash

There is some good news.

Under current law, most appreciated assets receive a step-up in basis at death. If an investor contributed $1 million to a private fund interest and that interest is worth $3 million at death, the heirs may generally inherit the asset with a basis closer to $3 million, not $1 million. That can eliminate or significantly reduce income tax on appreciation that occurred during the investor’s lifetime.

Holding the same private market investment inside an IRA versus a taxable account produces very different results at death. In a taxable account, heirs generally receive a step-up in basis, which can eliminate or sharply reduce capital gains tax on appreciation that occurred during the investor’s lifetime. Inside an IRA, there is no step-up in basis. Distributions are taxed as ordinary income to the beneficiary, and most non-spouse beneficiaries of IRAs inherited after 2019 must generally empty the account within ten years under current rules. That compressed timeline can force difficult liquidity decisions on an illiquid position. In addition, funding future capital calls on private fund interests held inside an IRA can be especially challenging. This is one reason many families prefer to hold the most illiquid alternatives in taxable accounts or revocable trusts rather than retirement accounts when possible.

For partnership interests, which is how many private equity, private credit, venture capital, real estate, and infrastructure funds are structured, there is another layer. The step-up generally adjusts the heir’s “outside basis” in the partnership interest. But the partnership may also need a Section 754 election to adjust the heir’s share of the “inside basis” of the partnership’s underlying assets. When a Section 754 election is in place, future depreciation, gain, and loss allocations may better reflect the stepped-up value.

That is a technical point, but an important one. Families should ask whether the fund has made or will make a Section 754 election, and they should review this with their tax advisor.

There are also limits. Not everything receives a step-up. Certain items may be treated as income in respect of a decedent, often called IRD, and can remain taxable to the estate or heirs. K-1s may continue. Phantom income may continue. Tax reporting can last for years.

The key point is this:

The step-up in basis can be valuable, but it does not solve the liquidity problem.

The estate may receive favorable tax treatment and still lack the cash needed to pay expenses, taxes, or capital calls.

The Estate Tax Liquidity Squeeze

For most families, federal estate tax may not be an issue under current exemption levels. For 2026, the federal estate and gift tax exemption is $15 million per person, or $30 million for a married couple. That removes federal estate tax from the picture for many families.

But “many” is not “all.”

Some families will still have taxable estates. Some states impose their own estate or inheritance taxes at lower thresholds. And even when no estate tax is owed, an estate may still need liquidity for legal fees, accounting fees, debts, property expenses, distributions to heirs, and ongoing investment obligations.

When estate tax is owed, it generally has to be paid in cash. That is where the problem becomes very real.

A family may have substantial wealth on paper but limited liquidity. If a large portion of the estate is tied up in private funds, private real estate, a closely held business, or other illiquid assets, the executor may be forced to sell liquid assets, borrow, use life insurance proceeds, or attempt to sell illiquid positions at a discount.

For operating businesses, certain estate tax installment payment rules may sometimes help. But passive private fund interests typically do not receive the same treatment as an active closely held business. That means families cannot assume the tax system will give them enough time to wait for a private fund to distribute cash.

This is why estate liquidity planning matters long before death.

Valuation Becomes More Important at Death

Private investments do not trade on an exchange. The value on the statement is not a public market price. It is usually a manager’s estimate based on models, appraisals, comparable transactions, financing rounds, or internal valuation policies.

At death, the estate needs a fair market value. That value may be used for estate tax reporting, basis step-up, trust accounting, and division among heirs.

But fair market value is not always the same as the value on the statement.

If the estate needs to sell quickly on the secondary market, the price may be meaningfully lower than reported NAV. Discounts for lack of control and lack of marketability may apply, especially with limited partnership interests. Those discounts may be appropriate, but they must be defensible. Larger or more complex estates may need a qualified appraisal.

This is another reason to review private holdings before they become an estate administration problem.

Structure by Structure: How the Gate Behaves at Death

The general principles apply across private markets, but each structure behaves differently when the estate actually tries to act.

The 1940 Act Mutual Fund: The Cleanest Case

This is the easiest structure from an estate settlement perspective.

Traditional open-end mutual funds generally offer daily liquidity. If the shares are held in a trust, TOD account, joint account, or properly titled custodial account, the process can often move relatively smoothly once the required death paperwork is completed.

The executor, trustee, or beneficiary can typically redeem shares and receive cash within the normal settlement period. Valuation is straightforward because the fund has a daily NAV. Tax reporting is familiar. There are generally no manager gates, capital calls, side pockets, or transfer restrictions to navigate.

The trade-off is the same one discussed in the original liquidity article: these vehicles usually cannot hold deeply illiquid private market assets in the same way a true private fund can. Their estate-settlement simplicity comes from the fact that the underlying holdings must remain much more liquid.

The 1940 Act Interval Fund: The Window Does Not Care That You Died

Interval funds are more complex.

They may be easy to buy and may report on a Form 1099, but they do not provide daily liquidity. Instead, they offer periodic repurchase windows, commonly quarterly. The fund is generally required to offer to repurchase between 5% and 25% of outstanding shares during each window. If investors request more liquidity than the fund is offering, requests are prorated.

Death usually does not override that process.

The estate or trust can submit a repurchase request, but it must generally wait for the next window. If the fund is oversubscribed, the estate may receive only a partial redemption. The remaining shares may need to be tendered again in future windows.

Some interval funds or non-traded vehicles include death-related provisions. They may waive early repurchase fees after death, or in some cases provide limited priority for deceased shareholders. But this is fund-specific. The details matter.

Two issues are especially important:

First, any death benefit or fee waiver may be capped.

Second, the waiver may apply only when shares are held by a natural person. If the shares are owned through a trust, LLC, or other entity, the provision may not apply.

That can create a planning conflict. The estate planning structure that helps avoid probate or centralize control may also change how the fund’s death provisions apply. This needs to be reviewed before the investment is made, not after death.

Evergreen Funds: Conditional Stays Conditional

Evergreen funds sit in the middle ground between interval funds and traditional capital call funds.

They are perpetual vehicles with no defined end date. They may offer periodic liquidity after an initial lockup, often quarterly, but that liquidity is conditional. The manager may cap redemptions, gate withdrawals, suspend liquidity, or move certain assets into side pockets.

At death, the estate or trust generally steps into the same position the investor held. The fund may require updated subscription documents, trust documents, estate documents, tax forms, anti-money laundering information, or investor qualification materials before recognizing the new owner.

The estate can usually request liquidity, but the request is subject to the same rules as everyone else.

In normal markets, the estate may be able to exit over several windows. In stressed markets, the family may inherit the same closed gate the investor would have faced.

Some evergreen funds may waive an initial lockup or early withdrawal charge after death. Others may not. Even when a waiver exists, it may not override the manager’s broader discretion to limit or suspend redemptions.

This is why the word “conditional” matters. Death may change who owns the asset, but it usually does not change the liquidity terms.

Capital Call Funds: The Estate May Inherit an Obligation, Not Just an Asset

This is where the complexity peaks.

Traditional private equity, private credit, venture capital, private real estate, and infrastructure funds often use a capital call structure. The investor commits a total dollar amount. The manager calls that capital over time as investments are made. The fund may last seven to twelve years, sometimes longer. Distributions occur when the manager exits investments.

There is usually no redemption right.

If the investor dies before the commitment is fully funded, the unfunded commitment generally does not disappear. It becomes an obligation of the estate, trust, or successor owner.

That can surprise families.

The estate may have to fund future capital calls even though it cannot redeem the investment. If the estate fails to meet a capital call, the fund documents may impose serious consequences, including interest charges, dilution, forced sale, loss of rights, or even forfeiture of some or all of the interest.

In other words, the family may inherit not only an illiquid asset, but also a future funding obligation.

The estate generally has three choices:

Hold the interest and receive distributions over time.
This may be the best economic outcome if the estate has sufficient liquidity elsewhere. The fund continues to operate, K-1s continue, and distributions are made as the manager exits investments.

Transfer the interest in kind to heirs or trusts.
This often requires general partner consent, new paperwork, and confirmation that the transferees are eligible investors. Heirs may initially receive only economic rights as assignees before being formally admitted as substitute limited partners.

Sell the interest on the secondary market.
This may provide liquidity, but it typically requires manager consent, can take months, involves transaction costs, and may occur at a meaningful discount to the stated value.

Capital call funds can be excellent long-term investments. But they require the most estate planning because they can create ongoing obligations after death.

Probate vs. Trust: Why Administration Can Be Easier or Harder

Private investments titled in a properly funded revocable trust may avoid probate and allow the successor trustee to act more quickly. Assets owned only in the individual’s name may need to pass through probate, which can be slower, more public, and more costly.

But trusts are not a magic solution.

The fund documents may still require manager consent before recognizing a transfer. The trustee may still need to provide documentation. Death waivers may or may not apply to trust-owned interests. Beneficiaries may still need to meet investor qualification requirements.

The trust can improve estate administration, but it does not rewrite the fund agreement.

Family Dynamics: Equal Is Not Always Easy

Illiquid investments can also create family friction.

One child may want cash. Another may want to hold the investment. One heir may be comfortable receiving K-1s and waiting for distributions. Another may not want anything to do with a private fund. One beneficiary may have the liquidity to fund future capital calls. Another may not.

If the estate plan says assets should be divided equally, the executor still has to decide how to divide something that cannot easily be sold or split.

This is why expectations matter. Families should know in advance whether private investments are intended to be held, sold, distributed in kind, or used as part of a broader equalization plan.

The Planning Questions That Should Be Asked Now

At The Wealth Stewards, we believe the estate conversation should happen before the check is written.

For clients with meaningful private market exposure, we ask questions like these:

How is each investment titled?

Who has authority to act if the investor dies?

Does the estate plan specifically give the trustee or executor authority to hold illiquid alternative investments?

Are there remaining unfunded capital commitments?

Is there sufficient liquidity elsewhere to meet those capital calls?

Do any funds provide death-related liquidity, fee waivers, or priority treatment?

Do those provisions still apply if the investment is held in a trust, LLC, IRA, or other entity?

Do the fund documents restrict transfers at death?

Will heirs need to be accredited investors or qualified purchasers to receive the interest?

Is there enough liquid capital to pay estate expenses, taxes, debts, and distributions without forcing a secondary sale?

Should life insurance, cash reserves, or marketable securities be earmarked as estate liquidity?

Have the estate attorney, CPA, and advisor reviewed the private investment documents together?

These questions are not academic. They determine whether a family can settle an estate smoothly or is forced to make rushed decisions under emotional and financial pressure.

Final Thoughts

In the original article, we made the point that liquidity restrictions are not necessarily flaws. Gates, lockups, redemption windows, and capital call structures can be features. They allow managers to hold investments through volatility, avoid forced selling, and pursue strategies that require patient capital.

That remains true.

But the same structure that protects the portfolio during life can complicate the estate after death.

The problem is not the gate. The problem is when the family does not know the gate exists until they are standing in front of it.

The goal is not to eliminate illiquidity. For the right client, illiquidity can be a source of return, discipline, and access to opportunities unavailable in public markets. The goal is to size it properly, title it correctly, understand the documents, plan for capital calls, and make sure the estate has enough liquidity elsewhere.

Private markets belong in many sophisticated portfolios. The case for them remains strong. But these investments can outlive the investor. When they do, the family inherits the rules.

The most important question is not simply:

Can I get my money back?

It is also:

Can my family manage this investment if I am no longer here?

That is the conversation every advisor should be having before the check is written, before the estate plan is finalized, and before the next generation is left to figure it out alone.

Everything discussed here is general information about how these structures commonly work. It is not legal or tax advice. The specific answer always depends on the fund documents, account title, estate plan, tax situation, and applicable state law.

If you would like to review your alternative investments through this estate and legacy planning lens, we would be happy to help.

To learn more about how The Wealth Stewards can help you, please contact us today.