When family agree to build a granny flat, the arrangement often includes that the parent pays for the build and the child owns the land. In Western Australia that puts a large part of the parent’s savings inside an asset belonging to somebody else. It’s important to document the agreement before any money changes hands.
What is a granny flat and why does it need legal advice?
A granny flat is a self-contained house located on the same property (land) as a primary home. A granny flat may be a home extension or a self-contained dwelling, but is on land that includes another primary home.
It can be a convenient and cost effective option, striking a good balance between close access to family and independent living. As no property transfer is required, there’s no transfer duty and no real estate agent fee, so the saving compared with selling or buying a property can be significant.
Why does the financial arrangement matter so much?
It is important to record the financial arrangements, particurarly where the parent is paying for the build on land that is owned by the child. What that may mean in practice is that a large part of the parent’s savings ends up in an asset owned by somebody else – and they may not have anything in writing to show for it.
An unwritten, informal granny flat agreement may work at the start, but it can unravel quickly if something unexpected changes. For example, the child separates, the house is in the asset pool and needs to be sold as part of the family property settlement; or the child’s business fails and the trustee in bankruptcy takes the property. On the other hand, the parent’s health may decline and they need residential aged care, but the money that would have paid for it is now built into someone else’s back garden. None of that requires anybody to behave badly or to fall out; but they are common unexpected consequences of these types of arrangements.
How do you protect everybody?
The best way to protect everyone is to record the arrangement in writing before the money moves. As your lawyers we can draft an agreement that protects your rights and helps prevent a disagreement or a relationship breakdown.
What the agreement covers depends on what the family intends:
- whether the money is a loan, a gift or payment for a right to live there;
- what happens if the parent moves out, needs aged care or dies;
- what happens if the child sells, separates or becomes bankrupt;
- whether the parent’s right to occupy is secured against the title; and
- who pays the rates, insurance and maintenance.
You may wish to make or review your Will at the same time. Where one child has received a substantial benefit during your lifetime, your Will can count it as part of their share so the others aren’t short-changed. See Estate planning trap no. 6 – lending money to children.
What about the pension?
Speak to Centrelink or the Department of Veterans’ Affairs before exchanging money or valuable assets for a granny flat, because your entitlements may be affected.
Paying for accommodation in someone else’s home has its own treatment under the social security rules and the amount you pay is tested for reasonableness. Pay more than the rules allow and the excess can be treated as a gift, which may affect your pension for years.
Frequently asked questions
Can I be on the title if my child owns the house?
Sometimes, though it changes the stamp duty, land tax and pension position. A registered right to occupy or a caveat protecting your interest, may achieve what you need without putting you on the title.
What happens if I need to go into aged care?
That’s a question the agreement should answer before it happens.
Does the granny flat form part of my estate?
No. It’s part of the land, which belongs to whoever owns the title. Your estate may include a debt owed to you, if the arrangement was documented as a loan. See You can’t give what you haven’t got.
Get the arrangement documented
If you need advice or assistance with a granny flat arrangement, get in touch or call us on (08) 9220 4444.
This article is general information and not legal advice. It isn’t financial or social security advice and you should check your own position with Centrelink or the Department of Veterans’ Affairs.
