Valuation of life/reversionary interests
Where two or more parties have interests in an asset or a Trust, there are occasions when one or both may wish to realise the full value of their interest immediately. This may be due to the need for cash or it may be because the cost of running the Trust is disproportionate to the size of the Trust.
Often a Will provides for a life tenant, for example where the surviving spouse has a right to reside in a property for the remainder of their life, with the value on death passing to other parties (the “remaindermen”). If the spouse is quite young, then the majority of the value of the property and therefore any Trust rests with the life tenant and the remaindermen’s interest is quite small. However in such cases, the remaindermen may see that it is some considerable time before they are likely to receive their benefits and therefore, except in the event of an untimely death, the remaindermen might consider their assets as being so remote that they are happy to settle for a small proportion of their value received soon.
Prior to the breaking of the trust, the “remaindermen”’s interest is usually a lump sum payable on the death of the life tenant. If the assets are real assets (property or equities) then some amount of growth can be expected on the value of the assets. Thus even for somebody in relatively senior years, the value of the remaindermen’s interests decreases with an increase in life expectancy.
Where the assets are for example a bank account or deposit account, then the discounting of the remaindermen’s interest is even more because there is a growth in the asset and discount is at a higher rate and therefore even at senior years the remainder men’s interest can be quite small.
Breaking the Trust is often a way of remaindermen obtaining some value for their inheritance rather than waiting until they believe it will be too old for them to enjoy the benefits.