Options for your Retirement - Why not consider a Granny Flat Interest…

Rosemary Carreras

Many people find that as they get older, living alone in their home is no longer feasible or may not be desirable. There are many reasons why older people decide to live with their children, such as wanting companionship, support or the peace of mind that someone is around to help. This may also be a better financial option for some than buying a place in a community village or a retirement home.

Granny Flat Interest

A granny flat interest is established when you exchange assets or money for the right to reside is someone else’s property for as long as you live. For example, a parent can transfer or sell their home under the granny flat provisions and pay money to their children for a lifetime right or the use of the granny flat (the ”granny flat interest”).

Granny Flats and Social Security Entitlements

Under normal circumstances Centrelink would deem the transferred property or funds as a gift and this would have an adverse impact on the parent’s pension entitlements.  However, the granny flat rules allow for any property transferred or money paid to the parent’s children to be exempt from Centrelink’s usual deeming rules provided the person has paid a “reasonable amount” for the granny flat interest. 

How does Centrelink assess your Granny Flat Interest?

Centrelink will look at the value of the asset transferred to see if a person has paid a ”reasonable amount”. There is a particular formula applied by Centrelink in determining what is reasonable based on a number of factors including  the age of the pensioner. If Centrelink considers a person has paid or transferred more than the value of the granny flat right, Centrelink will determine that the person has deprived himself or herself of an asset. This will then more than likely affect the person’s pension entitlement.

Do you need to build a separate Granny Flat?

Centrelink does not require you to build a separate granny flat or a separate residence (although this is often done). As long as there is a designated room or area that allows for the parent’s exclusive occupancy and there is an agreement to support the arrangement, Centrelink will usually approve the arrangement. It may even be that a person sells their home and buys a new home in their child’s name for them and the family to share.

Are there risks?

Granny flat arrangements often work out well. However problems can arise if circumstances change or relationships sour. It may be that the parent needs money to cover the bond for entry into aged care accommodation.

It is important to have a properly drafted agreement, not only to evidence the granny flat interest but also so that family members are clear about the terms under which they enter into this arrangement.  The agreement could cover things such as who does what for the other (eg. cooking and cleaning), who pays what bills but also what will happen if the parent’s health deteriorates and their care needs change (eg. they need to be placed in a nursing home or other care facility).

The Impact on Wills and Estate Planning

The parties to an agreement need to be aware that once the money or assets are transferred to a child in exchange for a granny flat interest, that asset will no longer form part of the parent’s estate. It is therefore important for people to address their estate plan when entering into granny flat arrangements. Proper planning is the best way of achieving your goals and avoiding disputes.

If you need advice planning for your loved ones’ retirement or would like further information on granny flat interests or wills and estate planning please contact our experienced lawyer:

Rosemary Carreras, Senior Associate
Phone: +61 2 9895 9277
Email:
rcarreras@colemangreig.com.au