Granny flat Interest arrangements between parents and their adult children are becoming increasingly popular. Such arrangements can be mutually beneficial and an excellent alternative to a retirement facility.
However, all too often issues can arise with pensions, wills, and even disputes between family members, which can lead to litigation, particularly when the agreement between the parent and child is not documented.
Proper advice and a properly drafted agreement can protect against most disputes. It can ensure that:
a) the parent has a secure life interest in the child’s home,
b) the disposition of assets will not affect the parent’s pension;
c) all parties know their rights and obligations, including in relation to ongoing payment of expenses and any caring obligations; and
d) a mechanism exists for determining what happens to the Granny Flat Interest if the parent ultimately needs to move out of the premises, or if the child seeks to sell the home.
This article refers to a Granny Flat Interest acquired by a parent from a child, however, there does not need to be any familial relation between the parties for a valid interest to be created.
What is a granny flat interest
A Granny Flat Interest is a life interest or life tenancy in a private residence. It is acquired in exchange for transferring an asset or assets to the owner of the residence or contributing to the purchase price of the property.
Type of Interest acquired – A life tenancy is the right to live in the property, whereas a life interest is the right to use and benefit from the property as you wish. To constitute a Granny Flat Interest for the purposes of the Social Securities Act, the parent must be living in the property.
Definition of “Granny Flat” – While the term “granny flat” ordinarily means a separate living area or separate structure on a property, a Granny Flat Interest does not need to be a distinct separate space in the home.
Type of asset transferred – The transferred asset can be the title in real estate (like the parent’s former home) or any other asset, including money.
Example 1: The parent buys a home in the child’s name in exchange for a lifetime right to reside there.
Example 2: The parent transfers the title to their existing home to the child in exchange for a life interest in the child’s existing home.
Example 3: The parent pays for the construction of a granny flat on property owned by the child.
Social Security benefits
In the above three examples, the assets transferred in exchange for a Granny Flat Interest would not affect the parent’s pension if they are “exempt assets” for the purpose of determining eligibility for the pension.
However, if the transferred assets are not exempt, or are a mixture or exempt and non-exempt assets, Centrelink will apply the “Reasonableness Test”.
The Reasonableness Test determines whether the value of the assets transferred is greater than the value of the Granny Flat Interest acquired. If so, the difference between the value of the transferred asset and the Granny Flat Interest will be considered a gift. There are thresholds on the value of gifts a pensioner can give each year before it begins to affect the pension.
Parents and children should discuss any proposed Granny Flat Interest with Centrelink or their financial advisor before entering creating a Granny Flat Interest.
Importance of an agreement
It is critical that any agreement to create a Granny Flat Interest is written and signed by the parties. To cover all the required aspects of the arrangement, such documents will often need to be quite detailed.
For example, a Granny Flat Interest agreement should contain at least the following matters:
- The details of the interest acquired and the assets to be transferred;
- The rights and obligations of the parties, including payment of bills, fees, rent, maintenance, insurance and other property outgoings;
- The rights and obligations of the child/carer, describing what type of care the child will be providing to the parent (if any);
- Conditions dealing with temporary absences like holidays or respite care;
- Circumstances in which the parties would expect the agreement to end, like upon the death of the child or when the parent requires a certain level of care; and
- A mechanism for how the agreement will end, including the refunding of any amounts paid to the child.
It is also critical that each party obtain independent legal and financial advice before entering into the arrangement.
If the relationship between the parent and the child sours, or if a dispute arises, a written agreement can ensure the interests of the parties are protected. The parent can be particularly vulnerable where a dispute arises and any previous agreement is not documented.
Impact on wills and succession
Any assets transferred under a Granny Flat Interest agreement will, of course, no longer form part of the parent’s estate (unless there is a refund mechanism in the agreement).
Since a person’s home if often their major asset, the Granny Flat Interest will significantly deplete the parent’s estate, which may affect the inheritance of the parent’s other children.
Further, if one child receives a significant portion of parent’s assets under a Granny Flat Interest agreement, the parties should consider the risk of a Family Provisions Claim against the parent’s estate by the other children. In which case, the granting of a Granny Flat Interest will likely be relevant under notional estate provisions.
It is therefore strongly recommended that any Granny Flat Interest arrangement be discussed with the parent’s other children before the agreement is made. The parent may wish to amend their will to ensure one sibling does not obtain a majority of their assets.
Alternatively, a mechanism can be included into the Granny Flat Interest agreement for the distribution of any refund to the other children upon the parent’s death.
Conclusion
Granny Flat Interests can be a sensible and mutually beneficial arrangement, both financially and personally. However, it is important to appreciate that the circumstances of the parties can change.
Parties to a Granny Flat Agreement should carefully consider their objectives and ensure the vicissitudes of life are accounted for.
If you would like James to address a particular legal issue, send your request to james.blaxland@ticliblaxland.com.au
This article is intended to be for information and educational purposes only and cannot be relied upon as legal advice. The information may not apply to your circumstances or to your particular situation. If you need specific advice or you have any questions, we welcome you to contact us directly.
