Granny flat arrangements are becoming increasingly popular. Too often however, a granny flat arrangement will fail to deliver what the parties were expecting leading to family disputes or even litigation.
What are granny flat arrangements? The traditional notion of an aged parent living in a flat in the backyard is only one such scenario. A granny flat interest can also be created where there is no separate living area and the parties all reside in the one home.
These arrangements usually occur in circumstances where the parent lacks the financial resources to house themselves adequately and a child steps in to fill the void. However, it may also involve situations where the child lacks the financial resources and the parent funds the purchase or construction of a dwelling in return for a right to reside in the property for life and be cared for in their old age.
This all sounds great in theory and families usually enter these arrangements with the best intentions. So what could possibly go wrong? A parent and child co-habiting combined with the intermixing of financial and property interests is fraught with difficulties and careful consideration needs to be given to a number of issues including:
• The parent’s security of tenure. What if the child wants to sell the home or it is sold following a marriage breakdown? What if there is a falling out between the parties?
• Pension entitlements. Will the parent’s financial contribution trigger the gifting provisions for social security purposes and reduce their pension entitlements?
• The impact on their testamentary intentions. How will the parents provide for their other children? Is the arrangement likely to cause a family dispute or litigation following the death of the parents?
• Aged care. What if the parents need to move into aged care, how will they fund an accommodation bond?
For granny flat arrangements to be workable for both parties and to avoid future legal action, there needs to be a careful assessment and consideration of whether or not the arrangement is appropriate in the circumstances. This involves all parties obtaining independent legal and financial advice.
While granny flat arrangements have traditionally been informal arrangements, to avoid the pitfalls and protect the interest of all parties they should be documented in a carefully drafted agreement. Other family members should ideally be involved in the discussions to avoid the suggestion that one child is taking advantage of vulnerable parents.
While a granny flat agreement will not always be appropriate, in the right context with careful legal and financial advice, they can achieve significant and beneficial outcomes for all parties.