Making a Granny Flat Arrangement

Australia is an aging nation, with more than 20% of the population projected to be older than 65 by 2050. Research (The Royal Commission into Aged Care Quality and Safety) indicates that Australians of all ages want to receive assistance to live independently at home for longer during their retirement. They want to avoid entering an aged care facility.

More than 75% of older Australians own their own home. But residing at home as they age may not be a practical option for many of them.

Challenging issues commonly experienced by families with aging relatives include the following:

  • Aging parents living at a distance who need to move closer for convenience and safety;
  • Aging family members living in a home that is too large for their needs that is physically and financially beyond them to maintain;
  • An aging family member living at home alone and experiencing mental health problems due to social isolation.
One potential solution is for a family member to provide the aging parent with care in exchange for a financial contribution from their cash reserves or sale of their home. The family carer could use those funds to purchase a larger home for all parties or build a separate residence on their property for the elderly family member. Such an arrangement is a private family arrangement known as a 'Granny Flat Agreement.'

Granny Flat Agreements FAQ: Frequently Asked Questions

A granny flat agreement is a concept that goes beyond a small structure built in the backyard to accommodate an aging parent. The term ‘granny flat right’ is used where assets, money, or title to a person’s home have been transferred in exchange for a right to lifetime accommodation in a private residence.

It is essential to consider a granny flat agreement in a Social Security context. Centrelink gifting rules provide that a person receiving a Centrelink pension cannot make any gifts of money over a certain threshold.

Centrelink’s ‘granny flat’ exceptions are designed to encourage the elderly to stay out of supported care. The elderly person obtaining the granny flat interest does not have legal ownership of the property they live in. A granny flat right only exists during the person’s lifetime and is not part of their estate.

There are no rules about age or relationships specified in Centrelink’s granny flat exceptions.

A Granny Flat Agreement might be considered in the following scenarios:

  • A child who owns acreage builds a separate dwelling for aging parents on their property using funds from the sale of the parent’s home;
  • Elderly parents purchase a property in their child’s name on the condition that the parents reside there for life; or
  • A child moves into the residence of their aging parent, and the legal title of the property is transferred to the child to ensure home care is provided.

Risk to estate

A granny flat agreement usually results in a parent paying a lump sum of cash or transferring a significant asset to a family member. The cash sum or value of the divested property creating the granny flat right might be a considerable portion of the aging parent’s estate. Upon that parent’s death, the cash or property used to create the granny flat interest will not be available to distribute under the deceased parent’s Will. This gives rise to a potential claim by other family members against the parent’s estate.

An agreement providing that elderly parents contribute funds or transfer property in exchange for care as they age should clearly set out the arrangements and obligations of all parties. For example, the agreement may provide the following:

  • The specific nature and extent of the child’s responsibilities to care for the parent;
  • Any obligation of the parent to maintain the property in which they will reside;
  • Any obligations to share expenses such as utilities and other living expenses; or
  • What will happen if the property must be sold and the circumstances in which the aging parent will be refunded their contribution.

Centrelink gifting rules

For an elderly person receiving a Centrelink pension, gifting rules provide that the pensioner cannot make gifts of money over a certain threshold.

However, Centrelink will exempt money paid under a Granny Flat Agreement if the payment is a ‘reasonable amount’.

If the amount is not considered reasonable, the aged pension may be impacted by the amount Centrelink believes was gifted.

Suppose the aging parent transfers title to a property and continues to live in that property under a right to occupy. In that case, no reasonable test will be applied.

If you are considering making a granny flat arrangement with an aging family member, you should speak to your lawyer and accountant to discuss the implications and risks. CLO lawyers will provide you with advice and guidance, ensuring that you make the best decisions for your family, in light of your unique circumstances.