When I meet clients for the first time who are considering a granny flat arrangement, their concern is that Mum or Dad may have to see out their days in a semi habitable building in the far back corner of their yard. Fortunately, this increasingly popular arrangement continues to evolve, and nothing could be further from the truth.
Before we discuss the definition of a Granny Flat arrangement, in what circumstances is it appropriate?
- The desire for an elder to avoid aged care & enjoy their final years ageing in place, whilst maintaining a sense of independence.
- An adult child who has been locked out of the residential property market following the steady increase home values.
- The same adult child who is willing and able to provide the elder accommodation, care & security.
A granny flat is an exchange of assets from the elder to another person, typically an adult child. In return, the adult child agrees to provide accommodation, care and security to the elder for the remainder of their life.
Now, back to my semi-habitable building concerns. The ‘accommodation’ may take various forms and I have listed several examples below; however it typically results in a multi- generational living arrangement:
- The elder moving into a home owned by the adult child.
- The elder transferring the title of their property into the name of the adult child who moves into the property.
- The elder transferring cash and/or other assets to the adult child to purchase, renovate or construct a new home.
It’s more than a spare room. We’re talking about an ideal living space for a loved one to enjoy for the rest of their life.
In any scenario, all parties should seek financial and independent legal advice and ensure the agreement is in writing and legally binding.
In addition, there are several estate planning upsides, including enjoying the meaningful financial change to their families lives from early estate distribution – an all too infrequent occurrence. Further, early estate distribution can act as an estate protection tool from beneficiaries the elder would like excluded from their estate.
Finally, there are generous Centrelink concessions. Under normal circumstances, if a person transfers assets to another, the amounts are considered a gift and included in the asset test which is used to calculate their aged pension. As assets increase, their aged pension decreases, however the granny flat arrangement broadly exempts the transferred assets and the aged pension is maintained and in some cases, increased!
The accuracy of the agreement from a Centrelink perspective is crucial as a poorly written agreement may result in an exempt asset, such as the elder’s home, becoming an assessable asset and the elder may lose their aged pension. This is a devastating result, particularly if the aged pension is their sole source of income and they have transferred the bulk of their wealth to their adult child.
So, what else should be considered?
We have discussed several financial and non-financial benefits, however it is a highly emotive and life changing decision and while no parent wants to believe their child could take advantage of them, life doesn’t always pan out how we expect.
A granny flat arrangement should theoretically benefit two parties. The person transferring their assets (elder) and the person receiving those assets (adult child) however life’s curveballs can quickly disrupt a successful arrangement:
- Adult child meets a new partner who is not comfortable sharing the home with an elder parent;
- A new job opportunity overseas or interstate;
- Financial challenges mean the home needs to be downsized;
- Elderly parents who feel they are overburdening their children in order to survive;
- Grandma or grandpa adding an extra set of hands to help with the grandkids may seem theoretically fantastic, however in many scenarios, the elderly parents may eventually require more intensive care than young children.
- Declining health and care needs beyond the adult child capability. Are there financial resources available to meet the cost of care at home or permanent aged care?
In almost every scenario, the elder has the most to lose. Plenty to think about within the context of a legally enforceable contract, all while trying to be there for family members.
Despite these very reasonable concerns, we’ve seen many families find success with intergenerational living, not least the ability for several generations to reman physically and emotionally connected.
In many cases, families save on the cost of in-home care for ageing parents by providing care themselves, making it well worth the additional emotional stress and responsibility.
The granny flat arrangement is likely one of the most unique arrangements you’ll encounter – no situation is alike and in the absence of a crystal ball, appropriate advice is critical to avoid pitfalls.
As always, it starts with legislation and numbers – then family, emotion, and a healthy dose of reality!