I heard a similar tale. The version I heard was that it was one of the early landowners (one who got a landgrant from the governor), not an Indian Chief. As to the daughters, one was selfish and the other was not and they really didn't get along at all. The one who was not selfish pleased her father more and that prompted him to make her the offer of any island. She chose it to prove her superiority.
Either way (or maybe there's more!), it's one of the many stories that makes living on this lake so interesting, don't you think?
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