Granny Flat Agreements

It is quite common for elderly parents to make the choice to move in with an adult child who is in a position to provide them with accommodation (and sometimes also care), rather than moving into a retirement village or care facility such as a nursing home.

While these arrangements are often quite informal, families should consider the appropriateness of entering into a formal agreement (a ‘granny flat agreement’) to record the terms of their arrangement.  This may particularly be appropriate where the arrangement includes the making of financial contributions.

Examples of scenarios where a granny flat agreement should be considered include the following:

1.  An elderly parent contributes money towards the purchase of a home that is suitable for both the elderly parent and their child (and, where applicable, their child’s family) and that home is to be owned in the child’s name solely. 

2. A child may agree to move in with their elderly parent in order to care for them, on the condition that ownership of the elderly parent’s house is transferred to the child. 

3. An elderly parent purchases a house in their child’s name on the condition that they be allowed to live there for the duration of their life with their child, who will help care for them. 

4. An elderly parent may pay for renovations to their child’s existing property in order to create a space that will be suitable for the elderly parent to move into. 

Although granny flat agreements most often occur between elderly parents and adult children, there is no rule that limits granny flat agreements only to family arrangements. Where there is an exchange of an asset (such as money or a property) for the right to live in a property for life it is strongly recommended that a formal granny flat agreement be entered into to help manage expectations, and to avoid misunderstandings and/or disputes.

Impact on Estate Planning

It is important that the parent understands that once an asset (e.g. money or a property) is transferred to the child in exchange for the parent’s right to reside in a property for life, the asset will no longer form a part of the parent’s estate. When a parent has more than one child this may result in one of their children benefitting significantly more than the others. It is crucial that the parent considers what impact the granny flat agreement will have on their estate and whether they wish to update their Will accordingly.

In circumstances where a parent passes away shortly after moving in with their child, if there is no granny flat agreement in place there is the added risk that the ‘windfall’ received by the child caring for them may be disputed by their other children as being inappropriate. For example, the child’s other siblings may attempt to argue that funds given to the child for the cost of renovating their house were not a ‘gift’, but rather a ‘loan’ which is to be repaid to the deceased parent’s estate. A formal granny flat agreement can serve to evidence the fact that there were no loan/repayment obligations on the part of the child who received the ‘benefit’.

Setting out expectations and obligations

In order to help minimise misunderstandings and reach agreements when circumstances change, it is crucial that a granny flat agreement sets out what the obligations are for each party, and what will happen if the right to reside for life comes to an end due to a change in circumstances. Things to consider include the following:

1. What area of the house will the parent reside in and will they have exclusive possession of this area? 

2. How much independence will the parent have? E.g. total independence, limited only by their own mobility versus a situation where the child will have significant care-related obligations. 

3. Will the parent be responsible for providing child care? 

4. Who is responsible for paying for outgoings, and in what proportions? E.g. electricity, phone, rates, water and insurance accounts etc. 

5. Who is responsible for the cost of maintenance and repairs to the property? 

6. Will a permanent right to reside apply to a substitute property if the child chooses to move and buy a new property? If not, will the parent be receiving a refund on account of their financial contributions, and if so, how is this to be calculated? 

7. If the parent’s health deteriorates and they need to move into a care facility, who is responsible for this cost? 

Impact on Centrelink Pension Entitlements

Strict limits apply as to how much a person is allowed to gift to a family member before it begins to have an impact on their pension entitlements. While ordinarily the transfer of property or funds from a parent to a child will be deemed to be a gift (which could have an adverse impact on the parent’s pension entitlements), Centrelink has special rules when it comes to granny flat agreements which (when complied with) could allow for the transfer of an asset without impacting the parent’s pension entitlements. It is therefore important that parties considering granny flat arrangements seek the necessary legal and financial advice, so they clearly understand the potential implications before committing to the arrangements. 

Although there is flexibility offered by Centrelink in terms of recognising different types of arrangements between family members, certain rules need to be complied with.  These include: 

1. The parent must have a right to occupy the property for the rest of their life; 

2. A payment must be made to obtain the right to occupy for life – It is also relevant to note that Centrelink will look at the value of the asset transferred to determine whether Centrelink considers that a ‘reasonable amount’ has been exchanged for the right of occupancy. If they consider that the parent has transferred more than the value of the granny flat rights, Centrelink will determine that the parent has been deprived of an asset and this will affect the amount of pension they are entitled to (notwithstanding that the other Centrelink requirements have been met); 

3. The home in which the accommodation is provided must be the parent’s principal place of residence; and 

4. The parent must not legally own the property which they are living in.

Where the parent is receiving a Centrelink pension it is important that financial advice be obtained regarding how Centrelink will assess the value of the granny flat interest and whether there will be an impact on their pension entitlements, before commitments are made by the parties to the proposed new living arrangements.

If you require advice or assistance with a proposed granny flat arrangement, please do not hesitate to contact one of our commercial solicitors via the link below.