Why You Should Discount Equity When a Beneficiary Family Wants Out of the Cabin and the Cabin Trust
One of the most difficult cabin trust discussions I have with clients is explaining why it is important to discount the value of a family’s interest in the cabin when that family decides to withdraw from the cabin and the cabin trust.
With multiple owners of the cabin (the kids), it is certain that at some point, someone will want out. The logical valuation of the withdrawing family’s share of the cabin would be a pro-rata share (all shares of equal value) that the remaining owners would pay the withdrawing owner’s family.
However, in reality, the withdrawing family’s equity should be discounted because of their decision to withdraw.
Why?
Because the remaining members must be given an incentive to buy the withdrawing members interest.
This situation came up recently with a client. She asked why would one of my children only receive 75% of their family’s equity in the cabin if they later decide to withdraw?
I explained that the other children will need some incentive to buy out the withdrawing child’s share, because without it, they might decide: “Why bother? What’s the benefit to me?”
In other words, if they don’t purchase the withdrawing family’s share, they can still use and enjoy the cabin without any additional expenses-so why do it? However, if they can get a 25% return on their money by purchasing the withdrawing members shares, it is likely that they will want to take that deal.
Without the discount, the children could fight over the benefit of purchasing the shares. If the only benefit the remaining members are gaining is the increased equity and nothing else, the additional cost of purchasing the withdrawing members share could cause serious friction. Discounting the share makes it an easy decision for the remaining family members.
So the answer is to discount the withdrawing family’s share to add some financial incentive to the remaining members and even out the deal for the kids.
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