If you are looking at possible options for your retirement or are considering moving an elderly parent into your home, a granny flat agreement can be a good option.

Granny flat agreements are where one or both parents are provided with accommodation in the home of an adult child in exchange for payment. Sometimes the parent(s) will sell their home to pay for a granny flat to be built at the child’s home.

While there’s no need to physically “build” a separate granny flat or a separate residence, there must be a designated room or area that allows for the parent’s exclusive accommodation for life. The parent is provided with accommodation and cannot own the property. And the home in which the accommodation is provided must be the parent’s principal home.

In most cases, care is required for the parent and this is in fact the impetus for considering a granny flat agreement in the first place.

What are the benefits of a granny flat agreement?

There are several advantages of a granny flat agreement:

• elderly parents are provided with a stable home and family support in their retirement;
• it can be a good and more cost-effective alternative to aged care if health permits;
• the adult child remains close to the elderly parent and can provide care as required;
• and Centrelink’s granny flat rules allow for any property transferred – or money paid – to the child to be exempt from the deprivation/gifting rules.

How does payment work?

Whatever the family arrangements are for security in old age, a granny flat agreement needs to establish a “granny flat interest”. There needs to be a transfer of assets/money to the owner of the property in which the parent will live, in exchange for a tenancy or “life interest” in their property.

Assets that can be transferred in exchange for a “granny flat interest” include transferring the title of the parent’s home, or other forms, such as cash, stocks, bonds or jewellery and heirlooms.

Centrelink will look at the value of the asset(s) transferred to see if the parent paid a “reasonable amount”. If they consider that the parent has transferred more than the value of the granny flat, they will determine that the parent has been deprived of an asset. This will directly affect the amount of pension received.

Parties entering into a granny flat agreement need to be aware that money or assets given to the child in exchange for the “granny flat interest” no longer forms part of the parent’s estate. This means that upon the death of the parent, any property or money handed over to the child will not be distributed in accordance with their will.

What happens if the child wants to sell the property?

Generally, once established, granny flat interests or rights cannot be revoked simply because a child wishes to sell the property. They may:

• sell the property with the parent’s arrangement as a condition of sale;
• transfer the parent’s life tenancy or interest to another property, or
• compensate the parent financially for losing their “granny flat interest”.

What should a granny flat agreement cover?

It’s extremely important the terms of the arrangement are very clear to avoid disagreements down the track.

The agreement should consider:

• who does what for whom (e.g. cooking, cleaning, washing etc);
• what kind of personal care and support the family will provide the parent with if any;
• who will pay for what (electricity, phone etc);
• if the parent will be liable for any upkeep of the property;
• how much privacy the parent will have within the home;
• how much independence the parent will have;
• if the parent will be involved in childcare for grandchildren, if any;
• what will happen if the parent’s health worsens and they need to be moved to a medical facility for a prolonged period;
• the circumstances under which the parent would allow assets to be sold, if assets are involved;
• what would happen if the child passes away;
• how the parent will be compensated if the granny flat agreement does not work out?

What can go wrong?

Problems can arise if parties do not take a long-term view. A parent may enter into a granny flat agreement when they are relatively healthy, but if their health deteriorates drastically it can require significant financial and lifestyle adjustments. If they need money to go into an aged care facility, this can create problems.

Siblings can feel that one child is receiving a financial advantage, given that a granny flat agreement will affect the parent’s estate. Any money or assets given to the child in exchange for the “granny flat interest” will no longer be distributed in accordance with their will. This can affect what other beneficiaries, such as siblings, will receive.

If the family falls out and the parent wants their money to be paid back, this can also create problems.

How can you prevent things from going wrong?

A good granny flat agreement will include provisions for what will happen if things don’t go to plan, such as if the relationship sours or if the parent’s health deteriorates.

Consultation early on can also prevent issues from arising down the track. Every family member in the household (such as the child’s spouse) should be consulted about the arrangement. Siblings not living in the same household should also be consulted because it’s important they feel comfortable that one child isn’t receiving an advantage over others and that the parent is protected.

Generally, all affected family members should “sign off” on the granny flat contract. Not because they are direct parties to the agreement but because it is vital they acknowledge witnessing and understanding the arrangement, which should be as transparent as possible to avoid disputes later on.