If you’re contributing money to an adult child’s property in return for somewhere to live, a granny flat agreement can clarify your rights and what happens if the property is sold, someone dies or family circumstances change.
It often starts as a straightforward family arrangement.
A parent sells their home and contributes money towards their son or daughter's property. They might pay for a granny flat to be built, contribute to the purchase of a larger home or pay down the mortgage.
In return, the parent expects to live there for the rest of their life.
Everyone understands the arrangement. No one expects the relationship to break down.
The difficulty comes years later if the property is sold, the adult child separates from their partner, someone dies, the parent needs aged care or the relationship between family members changes.
By then, the question is no longer what everyone intended. It is what legal rights were actually created.
If a parent is contributing significant money to an adult child's property in return for somewhere to live, the arrangement should usually be documented before the money changes hands.
A properly prepared granny flat agreement can record how much the parent is contributing, their right to live at the property and what happens if circumstances change.
It can also have important consequences for the parent's Age Pension and estate planning.
The agreement should deal with the difficult scenarios while everyone is still getting along, rather than leaving the family to work them out after something has gone wrong.
A granny flat interest does not necessarily mean there is a physical granny flat in the backyard.
For social security purposes, a granny flat interest can arise where a person pays for a life interest or lifetime right to accommodation in a private residence that will be their principal home.
For example, a parent might:
Services Australia has specific rules dealing with granny flat interests.
The precise arrangement matters.
The parent may be giving up a substantial asset, sometimes most of their available wealth, in return for a right that may need to last for the rest of their life.
Not necessarily for Services Australia to recognise a granny flat interest.
Services Australia may accept an arrangement even if it has not been put into writing.
That does not mean relying on a verbal family agreement is a good idea.
Services Australia recommends having a legal document prepared as evidence of what was agreed.
Where significant money or property is involved, a written agreement can record:
The distinction is important.
A written agreement is not necessarily a condition of Services Australia recognising the granny flat interest. From a legal and estate planning perspective, however, putting a substantial family financial arrangement in writing can be very important if circumstances later change.
This is where many arrangements become complicated.
Paying $300,000 towards a child's property does not necessarily mean the parent owns $300,000 worth of the property.
The legal effect depends on what was agreed and how the transaction was structured.
Was the money a gift?
Was it a loan?
Was it a contribution in exchange for a lifetime right to live there?
Was the parent supposed to acquire an interest in the property?
What happens to the contribution when the parent dies?
These questions should be answered when the arrangement is established.
If they are not, family members may later have very different recollections of what was intended.
This is an important issue to consider before the arrangement is entered into.
Suppose a parent contributes a substantial part of their life savings towards a property owned by their daughter and son-in-law.
Years later, the couple separates.
The property may now be relevant to their family law property settlement.
The parent's contribution and any legal or equitable interest they may have cannot simply be assumed to disappear. But the situation can become considerably more complicated if nothing was documented.
A written agreement can provide evidence of the nature of the parent's contribution and the rights that were intended to arise from it.
This does not guarantee that a family law dispute will have no effect on the arrangement.
It does put the parent in a much better position than relying on a conversation that occurred years earlier.
This should be addressed before the parent contributes their money.
The adult child may later want or need to sell because of:
If the parent's right is supposed to last for life, the agreement needs to address what happens to that right when the property is sold.
For example, does the parent receive money back?
How is that amount calculated?
Does the arrangement transfer to a replacement property?
Does the parent have to consent to a sale?
How much notice must be given?
The appropriate answer will depend on the arrangement.
Leaving the question unanswered is where the problem starts.
A lifetime right to live in a property may work perfectly while the parent is independent.
It can become much less useful if their health deteriorates and they need residential aged care.
At that point, the parent may need money for accommodation and care costs but may have already contributed much of their wealth to the child's property.
The agreement should consider what happens if the parent can no longer live at the property.
Depending on the arrangement, this might involve repayment of an amount, ending the right of occupation or another agreed financial mechanism.
Aged care and social security consequences should also be considered separately where relevant.
A granny flat arrangement can have significant consequences for the Age Pension and other means-tested payments.
For social security purposes, a granny flat interest can arise where a person gives money, assets or property to someone else in return for a lifetime right to live in a private residence that will be their principal home.
Services Australia considers the amount paid or transferred when assessing the granny flat interest.
In many cases, the value of the granny flat interest will be the amount paid.
In some circumstances, however, Services Australia applies a reasonableness test. This can arise where additional assets are transferred or where the amount paid needs to be tested against the value of the lifetime interest.
If part of the amount transferred exceeds the value attributed to the granny flat interest under the applicable rules, the excess may be treated as a gift and the deprivation rules may apply.
The amount contributed can also affect whether the person is treated as a homeowner or non-homeowner for social security purposes. This can affect the applicable assets test and eligibility for Rent Assistance.
Services Australia provides further information about how granny flat interests are assessed and also publishes examples of different granny flat arrangements.
If the parent receives, or expects to receive, the Age Pension, the social security consequences should be checked before money or property is transferred.
Leaving a granny flat arrangement can have social security consequences, particularly if it happens within five years after the interest was established.
However, moving out within five years does not automatically mean the original contribution will be treated as a gift.
Services Australia considers why the arrangement ended.
The deprivation rules may apply where the person leaves within five years and the reason for leaving could reasonably have been anticipated when the granny flat interest was created.
Different treatment can apply where the person leaves because of an unforeseen event.
Examples identified in the Social Security Guide include sudden illness, breakdown of the family relationship, elder abuse and circumstances where the property becomes uninhabitable.
This is another reason the agreement should deal with what happens if the arrangement ends earlier than expected.
If the parent needs to leave because of illness, aged care, family breakdown or another significant event, having a clear record of the original arrangement and the agreed consequences can become very important.
The agreement should state what happens when the parent dies.
In some arrangements, the parent's right simply ends on death.
There may be other financial consequences depending on how the contribution was structured.
This also needs to fit with the parent's will.
For example, a parent may intend to leave their estate equally between three children but have already transferred $400,000 to one child as part of a granny flat arrangement.
Was the $400,000 a gift?
Was it payment for a lifetime interest?
Was it a loan?
Was it intended to affect that child's entitlement under the parent's will?
The granny flat agreement and the will should therefore be considered together.
This is one of the scenarios families often overlook.
The property might pass under the adult child's will.
It might be jointly owned with their spouse and pass to that spouse.
There may be a mortgage over it.
The property may ultimately be controlled by someone who was not involved when the original arrangement was made.
The parent's right to remain living there should not depend solely on that person's goodwill.
A properly structured agreement should address what happens if the property owner dies before the parent.
Yes.
A substantial contribution to one child's property can become an issue later, particularly if the parent's will otherwise divides their estate equally between their children.
One sibling may regard the payment as an early inheritance.
Another may regard it as payment for accommodation.
The child who received the money may say it was compensation for providing care.
The parent may have intended something different again.
The problem is often not dishonesty.
It is that everyone understood the transaction differently.
Documenting the arrangement and reviewing the parent's estate plan at the same time can reduce that uncertainty.
Potentially.
If a parent transfers a substantial part of their wealth during their lifetime, their estate may be much smaller when they die.
That can become relevant if an eligible person later brings a Family Provision claim under the Succession Act 2006 (NSW).
NSW also has notional estate provisions that can, in certain circumstances, allow the Court to consider property that is no longer part of the deceased person's actual estate.
Whether those provisions apply is highly fact dependent.
A granny flat agreement does not prevent a Family Provision claim.
Proper documentation can, however, be important evidence of what the transaction actually involved and why it occurred.
Sometimes the problem is not death, divorce or aged care.
The family relationship simply deteriorates.
The parent may want to leave.
The adult child may want the parent to leave.
There may be arguments about money, grandchildren, care, privacy or how the household operates.
If the agreement anticipated early termination, there should be a mechanism for dealing with it.
Without one, the parties may need to determine their rights through negotiation or litigation.
Depending on how the arrangement was structured, disputes can involve contractual rights, equitable interests, property law and estate issues.
That is significantly more complicated than deciding at the beginning what should happen if either person wants the arrangement to end.
Often, yes.
The parent and adult child are entering the same arrangement, but their interests are not necessarily identical.
The parent may be concerned about security of accommodation and protecting the money they have contributed.
The adult child may be concerned about ownership of their property, borrowing arrangements and what happens if the parent leaves.
Other interests may also be involved, particularly where the adult child's spouse owns the property or is a borrower under the mortgage.
Independent advice becomes particularly important where:
The legal advice should match the size and risk of the transaction.
A granny flat agreement should not be considered in isolation.
Depending on the circumstances, the parent should also review their:
The arrangement may change the parent's financial position substantially.
Their estate planning documents should reflect that new reality.
If the parent later loses capacity, their attorney may also need to exercise rights or make decisions concerning the granny flat arrangement.
The documents need to work together.
Before the money is transferred.
Before the property is purchased.
Before construction begins.
And preferably before the parent sells their existing home if the transaction depends on those sale proceeds.
It is much easier to agree on what happens if things go wrong while everyone is getting along.
Once the money has changed hands, the parent has moved in and circumstances have changed, documenting the arrangement becomes more difficult.
If a parent is making a substantial financial contribution to an adult child's property in return for somewhere to live, it is worth documenting the arrangement properly.
This is not simply about what happens while everyone is happy with the arrangement.
It is about what happens if the property is sold, the adult child separates, someone dies, the parent needs aged care or the family relationship changes.
The larger the contribution, the more important those questions become.
Urban Law Group advises families on granny flat arrangements, property agreements, estate planning and disputes arising from informal family financial arrangements.
Getting the agreement right before the money changes hands is considerably easier than working out everyone's rights afterwards.
If you are dealing with a granny flat arrangement and would like to speak with one of our experienced lawyers, make an enquiry.