When we talk about “granny flat” arrangements, many people will picture a small structure being built in the backyard specifically to house an elderly person. This is one possible accommodation option that elderly people may consider if they get to the stage where they no longer wish to live in their own home. However, the concept of a granny flat arrangement can be much broader. Here we will explore some of the options, benefits, and of course, the risks.
What is a granny flat arrangement?
There are particular rules around Centrelink payments and granny flat arrangements, and for that purpose a granny flat arrangement is where a senior person pays to live in a home for their life. So, in addition to the traditional concept of a granny flat arrangement where a senior person might pay for the construction of a granny flat in the backyard of their child’s home, a granny flat arrangement may also arise where a senior person transfers their home to their child, based on an agreement that they may live in the house for their lifetime and will be cared for by their child or other family members. Other arrangements that may fall into the concept of a granny flat arrangement, might be where a senior person pools resources with their child to purchase a property, again based on an agreement that the senior person may live there for their life.
What are the benefits?
For many people, the major benefit of this type of arrangement is that they can remain living in a home environment, to be cared for by family members, for as long as possible. It may seem a more attractive proposition than moving into a retirement village, or an aged care facility. It may also seem a more attractive proposition than taking out a reverse mortgage to fund in-home care.
However, as you may expect, putting money into another person’s property, or pooling money together to buy property, has its risks and it is vital that if you are considering entering into one of these arrangements that you obtain both financial and legal advice first.
What are some of the financial implications?
Normally, if a person receiving a government pension gifts assets or money to someone, they are deemed to have made a gift, and for the purpose of assessing their pension, it is deemed they still have that money or that asset which can affect pension entitlements. However, there are some exceptions to these gifting rules when a granny +flat arrangement is entered into. For example, currently, if a pensioner transfers the title of their house to their child for no payment on the basis of an agreement that they can live there for the rest of their life, this would not be deemed a gift for pension purposes. However, there are specific requirements and it is vital that before you embark on any type of granny flat arrangement, you talk to a financial planner and consider whether there is going to be an impact to your pension. It is also important to seek advice regarding other financial implications. For example, it is possible that there could be capital gains tax consequences.
What are some of the other risks?
People usually go into these arrangements with the best of intentions, but it is very difficult to predict what the future holds. If you are transferring your property to your child, or spending a large sum of money to build a granny flat structure in their backyard, you need to consider what would happen if you had a falling out with your child. Then you need to consider what would happen if your child got into financial trouble and the house had to be sold. Perhaps in the future your child’s marriage might fall apart, resulting in a property settlement order that requires the property to be sold. All of these possibilities would leave you in a very undesirable situation and it may result in you being left out in the cold.
Unfortunately, it is impossible to eliminate all risks in these situations. Therefore, it’s important that you seek legal and financial advice so that you understand the risks and decide whether you want to take them on. If you decide to proceed, you should have a legal document drawn up, so that everyone goes into the arrangement knowing what the expectations are. The legal agreement can cover what the parties intentions are if things go wrong, such as financial trouble, marriage break ups etc., to try and lessen the risks as much as possible.
What about the impact on your estate?
In addition to the potential problems that granny flat arrangements can bring during your lifetime, it is a good idea to consider what will happen after you pass away. Let’s consider the following scenario:
Assume you have two children, and you have made a Will leaving your estate equally between them. However, prior to your death, you sold your home and used a large portion of the proceeds of sale to construct a granny flat in the backyard of the home of one of your children. When you pass away, the granny flat structure does not form part of your estate, and nor do the funds you used to construct it. As the structure is on the property owned by one of your children, legally they own the structure. The result is that your other child feels hard done by and receives only a very small sum from your estate. Your other child has benefited by an increase to the value of their property due to the construction of the granny flat.
Unfortunately, this is a situation that we have seen occur and it is something that you do need to consider and seek legal advice about when making the decision whether to embark on one of these arrangements.
This article covers just some of the aspects that you will need to consider if you are thinking about a granny flat arrangement with family. The important thing to keep in mind is that the first step you should take is to speak to your lawyer and your financial planner to discuss the financial implications and legal risks and decide if it is the best arrangement for you.
If you wish to discuss these arrangements, please do not hesitate to call our Elder Law team on 02 4929 3995.