Why Granny Flat Agreements are Important for Parents and Children

Granny Flats are a great way to live close to loved ones for support while maintaining independence. However, families need to carefully consider the financial and legal implications of this type of living arrangement. This includes creating a legally binding agreement that covers how the arrangement will work and what happens if circumstances change.

A formal Granny Flat agreement not only ensures the financial rights of each family member, it also allows everyone to discuss any concerns before they arise. This article explores what a Granny Flat agreement is, the key components and why they are essential for a harmonious multi-generational living arrangement.

What is a Granny Flat Agreement?

Granny Flats are an ideal solution to multi-generational living where an elderly parent can receive care or support. Often the older family member will contribute financially either by building a Granny Flat on their property and transferring the main residence to a family member or by building a second dwelling on an adult child’s property.

However, without a formal agreement, the non-homeowner has no legal interest in the property, including the Granny Flat they reside in. This makes them financially vulnerable, especially if circumstances change, their level of care changes, or relations between the parent and adult child soured.

A Granny Flat agreement sets out all the terms of the living arrangement and gives the parent the right to accommodation for life.

What is Granny Flat Interest?

Although a formal Granny Flat agreement is not a legal requirement, it helps an elderly parent overcome any financial disadvantages by protecting them.

If an elderly parent pays their adult child money for the right to reside in the Granny Flat for life, this is called a Granny Flat interest. They are considered to have an ‘interest’ in the property, even though they don’t legally own it. (A self-contained Granny Flat cannot be subdivided and sold, and it can only be constructed alongside a primary dwelling. Therefore, it belongs to whoever owns the primary residence).

Centrelink considers this ‘interest’ or property for life a primary dwelling when it comes to the asset test, helping the older person maintain pension entitlements and access payments such as rent assistance.

Why Granny Flat Agreements Are Important

It’s strongly recommended that families make legally binding Granny Flat agreements to protect both parties. For example, building a Granny Flat can help an adult child into their first home in exchange for providing support for an elderly parent. However, a parent living in a child’s home can be at a significant disadvantage if family arrangements change. For example, due to a marriage breakdown.

• Financial Security: The primary aim of a formal agreement is to protect an older parent’s estate and their right to reside in the Granny Flat for life. As a written agreement can help avoid capital gains tax (read more about Granny Flat Agreements and capital gains tax on the ATO website), it also benefits the property owner.
• Clear Expectations: Avoiding misunderstandings about responsibilities from the outset can preserve the parent and child relationship by preventing conflict.
• Legal Protection: A contract helps protect the child’s property and investments once the parent passes and can help avoid disputes over estate planning with other children.

Key Components of a Granny Flat Agreement

As well as providing financial protection for both parties, many families also use formal agreements to set expectations about the division of responsibilities and clear boundaries on how living under one roof will work. There are some key things a formal Granny Flat arrangement should cover.

What will day-to-day living look like? How much independence will the parent have? Will both parties continue to live their own life as normal, providing just companionship, or is one party expected to help the other in exchange for services or support? For example, what are the child care and personal care arrangements?

The financial implications of the Granny Flat arrangement should also be considered. Discuss the value of the asset (primary home), will the parent pay rent, who pays for utilities, what will the second dwelling look like and how will it be designed? How will money be released if the home needs to be sold? How will the parent access funds if their personal care needs change?

What happens if the agreement needs to change? Are there exit strategies in place? For example, if the parent’s health deteriorates and they need to go into aged care or a nursing home, or the child dies before the parent passes.

How is money paid for maintenance and repairs on the Granny Flat and who covers what? Is the parent expected to help maintain the existing property or is the child expected to maintain the Granny Flat?

How to Create a Granny Flat Agreement

Granny Flat rights can be complex so you should always seek advice from a legal expert to help draft a formal Granny Flat Agreement so that it can be considered legally binding. Financial planning advice can also be helpful to ensure you will not be penalised financially.

Professional legal advice ensures the Granny Flat arrangement covers the needs and expectations of both parties in a clear and detailed way and protects the most vulnerable party’s right to reside. It also protects the parent financially in other ways, such as ensuring their pension entitlements are not compromised.

While it can be difficult to raise these issues with family, older people especially should consider these living arrangements an important part of their estate planning and a way to maintain a great relationship with their adult children.

Common Mistakes to Avoid in Your Granny Flat Arrangement

Informal family arrangements and verbal agreements don’t help either party protect their property asset. In the long run, they don’t help the parent-child relationship either. Therefore, it’s essential to seek professional legal advice that considers all scenarios.

Be prepared to be realistic about what will happen when life circumstances change. A child may need to move to a new property for work, they may face relationship breakdowns, and a parent may eventually require a higher level of care that only a nursing home can provide. Be clear about the possibilities and expectations to ensure a stress-free multi-generational household.

Frequently Asked Questions

What are the benefits of a Granny Flat agreement?

A legally binding contract prevents elder abuse by clearly defining the parameters around living together on one property. However, formalising the living agreement with an elderly parent also has benefits for the child.

What is the Granny Flat rule for Centrelink?

When an asset transferred to a child buys the parent the right to live somewhere for life, it’s known as a Granny Flat interest. Centrelink considers this investment a primary dwelling when looking at the parent’s estate and it’s therefore excluded when determining pension entitlements.

Will building a Granny Flat affect my pension?

The key to keeping your pension whilst giving your child a leg up in the property market is to exchange it for a right to reside so that it is not seen as a gift by Centrelink. Seek professional advice to ensure you don’t lose your pension entitlements.

Build Today with Granny Flat Solutions

As a multi-award-winning Granny Flat builder with many years of experience, you can rest assured that we know all there is to know about building second dwellings. When you build a Granny Flat with us, you don’t have to think of everything because we already have.

For more information or a consultation, contact us today to get started.