In Australia, it is common for families to have a variety of different living arrangements, such as where a parent decides to live with their adult child in their home. The precise terms of each arrangement can be vastly different, each with their own legal implications. Some common arrangements include:
- Parents contributing to the purchase price of a child’s property, with an understanding or legal right (life estate) that allows them to reside in the property during their lifetime;
- Parents purchasing and co-owning property (either as tenants in common on joint tenants) with their children;
- Parents building a granny flat in the backyard of their child’s property or making other contributions towards the maintenance or renovations on the property.
Many families make informal granny flat arrangements between themselves which determine how an elder family member will be cared for while living in a granny flat or within their adult child’s home. While this appears to be an easy option for the family, it can cause a number of future issues if the rights and responsibilities of all parties are not adequately documented from the inception.
What is a granny flat interest?
These types of arrangements are known as ‘granny flat interests’, which can be defined as agreements for accommodation for life.
There are many ways a granny flat interest may arise, including an arrangement made whereby a parent moves into the child’s home or the child moves into the adult’s home. Such arrangements may or not involve a formal transfer of title or part interest in the title from one to the other or a transfer of a sum of money from one party to the other.
On occasions, renovations to the property are minor in nature. However, they may sometimes include major renovations or improvements, such as the construction of a granny flat, being attached or detached secondary dwellings erected on the land. There are also “pop up” granny flats on wheels which can be driven away. On other occasions, a property (generally that of a parent) is sold and a new property is purchased (generally in a child’s name) to accommodate the family of the parent and child.
Issues that can arise with granny flat arrangements
Some of the issues that can arise or need to be considered with granny flat arrangments include:
1. What will happen if there is a breakdown of the relationship between the parents and children or the circumstances of either party change?
It is imperative that the parties adequately record the arrangement and include:
- the background of the agreement
- the contributions made by each party
- the obligations of the parent or the child/carer and any agreed tasks to be provided and undertaken by the child/carer
- who is responsible for the payment of the property outgoings
- obligations as to insurance of the property
- how much privacy each party will have within the home
- how much independence each party will have to lead their own life
- how much time the parent wishes to spend with grandchildren and whether they want to be involved in childcare
- what happens if the parent’s health deteriorates and their care needs change (for example, if they need to be placed in a nursing home)
- holidays, absences and periods of respite
- termination of the agreement and a mechanism as to what is to occur the following termination.
If there is no documented agreement between the parties, this could leave an elderly parent vulnerable and both parties could be potentially exposed to lengthy, time consuming and costly court costs.
2. A granny flat interest can potentially affect an elderly person’s pension entitlement – Centrelink will look at the value of the asset transferred to see if the amount paid was a “reasonable amount”. For more information, visit the Department of Human Services website.
3. A granny flat interest can also have a CGT effect on the child’s home.
4. If there are multiple children, you should seek advice to determine the effect that the arrangement may have on your inheritance – For example, if a parent buys a property with a child and it is purchased as joint tenants, then the property will automatically pass to that child (the other joint tenant) if the parent passes away. This may be an unintended consequence.
The absence of any formal legal documents or agreements surrounding granny flat arrangements can lead to substantial legal fees being incurred later on if a dispute arises regarding the arrangement. The cost of documenting such arrangement and obtaining legal advice from the inception is generally a fraction of the price that you will pay if the dispute ends up in Court which often happens.
If you would like legal advice on a granny flat arrangement and would like to discuss your option, please contact Rockliffs Lawyers.