As our baby boomers move into the next stage of life, it is no wonder why we are seeing an increase in the preparation of Granny Flat Agreements.

Rather than parents moving into retirement or aged care, they are opting to make a financial contribution to their child’s property in exchange for a right to occupy the property for their lives.

This arrangement often provides the parent with the safety of having family near and able to care for them (if needed), and also offers a more social way of life, maintaining close relationships with grandchildren and extended family.

There is no doubt these types of arrangements will become a staple in our community moving forward. 

However, if you are contemplating a granny flat arrangement, or having your parents move in with you in exchange for a financial contribution, having a documented agreement could mean the world of difference in the face of unforeseen circumstances.

What constitutes a granny flat arrangement?

A granny flat arrangement takes many different forms, including:

1. The parents may opt to transfer their whole property to a child or loved one in exchange for their right to occupy the property for their lives.

2. The parents may opt to sell their whole property to a child or loved on for a reduced price in exchange for their right to occupy the property for their lives.

3. The parents may opt to buy a property in the name of their child or loved on in exchange for their right to occupy the property for their lives.

4. The parents may opt to sell an investment property and contribute financially to their child’s property (for the building of a granny flat or modification to their child or loved one’s home) in exchange for their right to occupy the property for their lives.

However, as a general rule, if I am preparing a Granny Flat Agreement for a client who is receiving a pension from Centrelink, my recommendation is to always confirm the arrangement with Centrelink before proceeding. 

Why should you confirm the granny flat arrangement with Centrelink prior to proceeding?

If a parent is receiving a pension from Centrelink, they will be subject to the gifting rules.

For a person receiving a pension, the gifting rules mean they may only:

• Gift an amount of $10,000 per financial year; and
• They may only gift an amount of $30,000 over a rolling period of 5 years.

Accordingly, if a parent is wishing to enter into a granny flat arrangement, and they have not checked their arrangement is acceptable to Centrelink, they risk breaching the gifting rules.

The consequence of breaching the gifting rules is that Centrelink may reduce the parent’s pension.

What is the benefit of a Granny Flat Agreement?

Unfortunately, relationship difficulties can never be completely avoided, even with the best of intentions. 

Sometimes, the difficulties in the relationship may not be between the parent and child (of the Granny Flat Agreement), rather it may be caused by an estranged sibling, or alternatively, the marriage breakdown between the child and their spouse (to which the parent is living).

I stress to clients that a Granny Flat Agreement gives clarity not only to govern the arrangement between parent and child, but also to outside parties. The agreement should provide clarity on nature and extent of the living arrangement itself, but further, it should clarify how the parents may receive a repayment of funds if the agreement ends early.

A Granny Flat Agreement should cover matters such as:

1. What the arrangement looks like – for example, if there is a specific granny flat being constructed, the agreement should clarify what the layout of the flat should be, the cost and the time frame for construction.

2. What care arrangement has been agreed to – for example, if there is an expectation that the child will provide care and assist the parent to attend medical and personal appointments, the agreement should clearly state this.

3. Who will be responsible for the outlays relating to the property – the agreement should state who will be responsible for the payment of rates, insurance and the utilities of the property. If there is an expectation that the parent will pay, or contribute to these costs, the agreement should reflect this.

4. Will the agreement be secured or unsecured – the parent may choose to secure their contribution to their child’s property by way of a mortgage or a caveat. Alternatively, the agreement may be unsecured. 

5. What will happen to the arrangement if it is voluntarily ended – for example, the arrangement may need to be ended if the child, or their spouse, falls into bankruptcy and the property is called in by the bankruptcy trustee. Conversely, if the child and their spouse separate and the property has to be sold as part of the property settlement, this will impact on the parent. The agreement should clarify what happens in these circumstances.

6. If the arrangement comes to an end, voluntarily, will the parent receive repayment of a sum of money – if the agreement comes to an end, especially before 5 years of time has passed, the parent may be at risk of breaching the gifting rules. In these circumstances, it is generally my recommendation that the agreement reflect some form of repayment by the child to the parent if the agreement comes to an end in the first 5 years.

Importance of ensuring your Wills are up to date

When preparing a Granny Flat Agreement, it is my strong recommendation that all parties have their Wills and estate planning up to date.

The Wills of the parties should reflect there is a granny flat arrangement in place, and the parent has a right to occupy the property. This will ensure that if the child passes, the parent is not in circumstances where their interest is terminated without notice or consideration (especially if the agreement is unsecured).

If you are contemplating entering into a granny flat arrangement with a loved one, I recommend discussing your proposed arrangement with a solicitor prior to the transfer of any property.

Contact our team today to discuss your grannt flat agreements or if you have any other Wills and Estates needs.