Deciding on living arrangements for elderly people is a question nearly all Australian families eventually have to face.
Australians are living longer than ever before and at some stage, maintaining a house with a garden or simply living on their own can become too much for people of advanced years.
While some elderly people may enter a retirement village or an aged care facility, many families would prefer for an elderly parent to live with family members.
There is a whole range of possible ways in which families might provide a granny flat arrangement for an elderly person. It might involve the elderly person moving into a self-contained granny flat located on the family member’s property. It might involve the elderly person moving into the home of one of their adult children. It might involve the elderly person transferring their real property to one of their children in exchange for a right to occupy and a promise that the child will look after the elderly parent. It may also involve the elderly person providing significant funds to either buy, construct or renovate a property to make it suitable for both the elderly person and the family member’s needs.
The common features of a granny flat agreement involve the elderly person exchanging funds or assets in return for a life interest or a right to reside in the family member’s property, with the elderly person not owning the real property in their own name.
In any of the above situations, there are some important risks, including legal and financial risks, as well as risks to the security and welfare of the elderly person and to family relationships. It is sensible to identify and manage those risks well at the outset to prevent problems and disputes arising in the future.
Important considerations in relation to granny flat arrangements
We highly recommend that the parties enter into a written “granny flat agreement” to clearly record the terms of the arrangement.
This will prevent confusion and misunderstanding and will promote family harmony. It will also ensure that each of the parties to the agreement has a clear understanding of the terms.
It is critical to identify and record whether any funds which are being provided by the elderly person to the family member is by way of a gift, or a loan, or something else. This issue will have serious consequences for the elderly person’s financial security and their estate.
This issue can also cause unintended problems if the elderly person has appointed the family member as one of their attorneys under an Enduring Power of Attorney. This is because there is a presumption of undue influence which applies to any transactions which benefit an attorney, even if the attorney has not commenced acting as an attorney.
There are also some major legal differences between a life interest and a right to reside, so this issue should be carefully considered and recorded in the agreement.
It is important to consider what will happen if the granny flat arrangements cannot continue. This may occur for a range of reasons including:
- if the elderly person is assessed as needing to enter aged care;
- if the family member wishes or needs to sell the property for any reason;
- if the family member suffers a marital breakdown or bankruptcy;
- if the family member loses capacity;
- if there is a breakdown in the relationship between the parties for any reason.
To avoid the uncertainty inherent in informal family arrangements, a legally enforceable agreement is the most sensible way to formalise this arrangement and protect the interests of each party.
The written agreement can also be a useful tool to reduce upset or disagreement within the broader family. We recommend that all affected family members, including the other children of the elderly person, are made aware of and endorse the terms of the granny flat agreement at the time it is signed.
Finally, the process of the elderly person engaging with a solicitor and a financial planner to discuss a granny flat agreement will help to identify if there are any concerns regarding the capacity of the elderly person and or if anyone is applying undue influence on the elderly person. Both of these issues can be used to dispute the validity of a contract or a will. It is important these issues are identified and appropriately addressed before the elderly person part with their money or assets.
Centrelink and tax implications of granny flat arrangements
If the elderly person is in receipt of any Centrelink pension, it is extremely important that the elderly person obtain specialist advice from a financial planner or financial adviser to consider the possible consequences of the granny flat arrangement on their pension entitlements.
Centrelink uses special rules to assess granny flat arrangements.
Centrelink requires persons who exchange money or assets for a right of occupancy to tell Centrelink how much was transferred or paid to create the granny flat interest. This allows Centrelink to determine whether the person is a homeowner or a non-homeowner for the purposes of the assets test threshold.
Centrelink applies a particular formula to test whether a ‘reasonable amount’ was paid for the granny flat interest. If an elderly person gave away an asset without getting something of at least equal value in return, this will be regarded as a ‘gift’ or a ‘deprived’ asset and may affect the person’s pension.
A written granny flat agreement will assist a person to satisfy Centrelink that they received something of benefit (for example, a right of occupancy) in exchange for funds or assets that they provided to their child. This will reduce the risk of Centrelink assessing that the elderly person gifted or ‘deprived’ themselves of those funds or assets, which can result in them no longer being eligible to receive the pension.
There may also be tax consequences that arise as a result of granny flat arrangements. It is strongly recommended that advice from an accountant or tax adviser be obtained. There may be capital gains tax benefits that are only available for those who have a written granny flat agreement in place.
Seek expert legal advice
The rules around granny flat arrangements, in particular in relation to Centrelink’s assessment of how the interest is created and the implications for a person’s pension and other benefits, can be complex.
Seeking the advice of legal professionals with experience in drafting granny flat agreements, along with obtaining professional financial and tax advice, is the best way to ensure that the rights and obligations of all parties are clarified and protected.