Beware of the Granny Flat traps

Setting the scene

Marilyn is 67 and has had enough of work. She has worked hard and raised two children on her own and she’s ready for some “me time”. Her children are now adults and live at opposite ends of Australia to her. Marilyn has sold her (big) home and has moved north to be closer to her daughter and partner who have their own baby now.

Marilyn’s daughter and partner are struggling on just the one wage. They rent but are looking for their own home to raise their now-growing family. Marilyn’s son has his own family and home and is doing pretty well in his career.

Marilyn is looking to assist her daughter to purchase a property. She would live there as well and help out whilst being able to come and go as she pleases to live-out her much anticipated retirement adventures. However, Marilyn is also thinking about how her son feels about her retirement and relocation plan.

 

Beware of the Granny Flat traps

What do others do in this situation?

It’s becoming increasingly common for older Australians to enter into arrangements to live with their family. Adult children help their parents with household and living tasks, whilst grandparents assist their busy children with looking after the grandchildren.

Additionally, the rising costs of residential property in Australia in recent times has led to a greater desire for older Australians to assist their adult children enter the property market.

One way to achieve all of this is by setting up a co-occupancy arrangement. One such arrangement is a “granny flat interest”.

The dream…

Picture this. A “neat as a pin” home that you live in. It’s big enough to be comfortable in, easy to look after and has all your own things in it. Your home is surrounded by a beautiful garden and is a place where you can simply kick back and relax.

The difference is that your home is on the same block of land as your family. Both homes are close enough – but you don’t live on top of each other. You and your family can come and go as you please but still have your own peace-and-quiet and privacy.

That’s the way the television and newspaper ads show it and how the builders sell it to you. This is what life in a granny flat is all about. Right?

Other living arrangements

A granny flat can be more than just a self-contained flat in someone’s house or on their land.

A granny flat interest is established when you transfer assets (such as cash & property/land) to another person in exchange for a right of occupancy for life in a residential property. You are not the “legal owner” of the property – your name isn’t on the property title. You just live there … for the rest of your life.

Granny flat interests are created when you enter into any of the following arrangements:

  1. You transfer the title of the home you own and live in to someone else and retain a lifetime right to live in that home – the other person and their family may or may not also move in with you.

  2. You provide funds to another person in exchange for the right to live in that person’s existing home.

  3. You provide some, or all, of the purchase price of a property registered in another person’s name and retain a right to occupancy for life.

  4. You pay for the construction and/or renovation of a home on another person’s property and retain a right to occupancy for life.

The potential nightmare…

People fall in love with the dream… and that’s really easy to do.

Stephen R. Covey wrote a blockbuster book called The 7 Habits of Highly Effective People. One of the habits (number 2 in fact) is to “begin with the end in mind”. It’s a very important habit to get into … but one that (sadly) many people forget and it only becomes important when something doesn’t work out and the dream starts to unravel.

When setting up a granny flat interest you are contributing something of value to you (money, property, etc) to someone else without actually “owning anything” in the end.

The things for you to consider (at the start … not the end) include:

  • Can you still afford your retirement living lifestyle?

  • What will be the impact on any age pension funding from the Government? There are a number of rules and “special” rules that apply in relation to granny flat interests.

  • You may be signing over your home to another person or providing them with a lot of money. That person is more than likely your son or daughter (your blood) … but what would happen if that person divorces, dies or becomes bankrupt?

  • There may be “other costs” associated with setting up a granny flat interest – these may include capital gains tax (CGT), land tax, stamp duty and legal fees for the drafting of agreements and transfer of property title.

  • You should put everything in writing to ensure everyone knows exactly what’s involved, how it will be achieved and what to do if there are any problems. Yes, it is family… but circumstances can change or the arrangement breaks down and ceases to work at a future point.

  • Your estate planning wishes should also be revisited when establishing a granny flat arrangement – given that one member of your family will benefit now over other family members. What happens if your other children consider that their entitlement (aka inheritance) has been eroded and the arrangement is inequitable?

If you’re considering moving into Aged Care and would like to talk about your financial options, call us today on 03 9553 0271.

Source: Reproduced with permission of Family Aged Care Advocates

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No specific person’s personal objectives, needs or financial situations were taken into consideration when creating the content for this article. Family Aged Care Advocates Pty Ltd (ABN 77 642 454 484) are aged care specialists. You should seek qualified financial planning, taxation and legal advice before making any decisions that are unique to your circumstances.

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CFP® Dip FP
Authorised Representative 298494
Interprac Financial Planning Pty Ltd 

Darryl Jopling

Senior Adviser

I have worked in the financial services industry since 1982 and as a Financial Adviser since 1999.

I have worked for large Financial Planning businesses, Membership based organisations and looked after the financial planning needs of clients within an Accounting Practice before starting my own business.

I am married, have 4 older children and a grandson and I am keen golfer with mixed results like many .

I have been through many of the strategies I talk with clients about myself and with my family.

I have been through the journey of seeing my parents move into Aged care and negotiated the difficulties and pitfalls of understanding the system for them and this gives me an excellent insight into what is required to assist families at this difficult time.

In a previous roll I used to run retirement seminars looking at Centrelink and Retirement Incomes and how to make these work for you. I have helped many of my clients with Aged Care advice when their parents needed to move into Nursing Homes. For many clients I assist them with superannuation, building wealth and protecting their loved ones with insurance.

I am supported by his, Licensee, Interprac Financial Planning’s in-house resources and ongoing technical, systems and training.

I am committed to understanding your needs and identifying strategies and products to help you achieve your goals.

My guiding principle as an Adviser is to design plans which help to provide my clients with clarity of purpose and the opportunity to build a solid financial foundation.
I will take the time to listen, explain things clearly and keep you informed throughout the advice process.

My experience is complemented by professional qualifications including:

  • Certified Financial PlannerTM Professional
  • Diploma of Financial Planning

At Choice Financial Advice we work with you along the way on life’s journey.

Whether you are getting married, starting a family, embarking on the trip of a lifetime, planning to enjoy your years after work or assisting elderly parents with Aged Care and Nursing Home placements, we can help.