For some families trying to support ageing parents a granny flat can seem like the perfect solution – parents living safely with children close by to provide help if needed. But what can seem like a simple solution can have significant legal and financial consequences.
Firstly it’s important to understand that a granny flat right doesn’t necessarily involve the construction of a separate dwelling. Where parents move in with children it could simply be a bedroom with an ensuite. And where children move in with the parents the granny flat right is often the existing home of the older person.
How much can someone pay for a granny flat right? As granny flat arrangements are normally private agreements between family members it can be difficult to apply a value. If a child moves in with a parent and the parent transfers the ownership of the property in exchange for their granny flat right then that is the value. However, when the older person is transferring more than the cost of construction (or modification) or more than the value of their home a reasonableness test is applied.
The reasonableness test uses a factor based on the person’s age next birthday (if they are a member of a couple it is the youngest member’s age next birthday) multiplied by the couple rate of pension. For example someone whose age next birthday is 74 would have a factor of 14.25, giving them a reasonableness test amount of $484,243. Any amount transferred above this would be considered a gift.
The amount someone pays will determine if they are considered a homeowner or not for pension purposes and their eligibility for rent assistance. Where the amount paid is more than $149,000 the person is considered a homeowner for pension purposes and cannot claim rent assistance, where the amount paid is less than $149,000 the reverse is true.
When is a granny flat not a granny flat? A key element to having a living arrangement recognised as a granny flat right is that the older person has no legal ownership in the property. This is where these arrangements can get tricky because the house is normally the biggest asset of the future estate, and that estate has more than one beneficiary – transferring the house to only one child essentially “disinherits” the others. Sometimes, in an attempt to ensure that the will remains fair, the parents transfer part of the house and become tenants in common with the children they live with. While this may solve the estate planning issues they have created a situation where the amount they have transferred to their children may be considered a gift and if they subsequently move in to aged care the value of the asset may be included in the means test.
What should people do? There is no substitute for specialist legal and financial advice. While it may sound silly to have a legal contract for a family arrangement it provides everyone (children and parents) with certainty about future events, like what happens if the children want to go on holidays, if the house is sold or the parent/s need to access care? Specialist financial advice ensures that you understand the consequences on your pension entitlement, invest any monies coming from the sale of your house wisely and are aware of the impact on the cost of a home care package or residential aged care should you need it in the future.
By Rachel Lane
Aged Care Gurus