Sometimes a formal care agreement is struck between an elderly parent (person in need of care) and a child (care provider) where, in exchange for money or the transfer of the home of the parent to the child, the child will allow the parent to live in the home and provide care to the person in need of care instead of the person in need of care entering a retirement village or an aged care facility.

Another variation of this type of agreement is where the parent will pay to construct a granny flat at the child’s residence to live in, adding value to the child’s home.

These arrangements are commonly known as a “Granny Flat Agreement”.

Given the amount of money changing hands and the difficulties that can arise in family relationships, it is wise to formally document such an agreement.

Additionally, there could be impacts upon the pension of the parent and the Department of Human Service Guidelines must be carefully considered when contemplating a Granny Flat Agreement.

Department of Human Services Guidelines

The Department of Human Services:

  • provides that a granny flat interest is created if a person in need of care “paid the owner of their principal place of residence for the right to live there for the rest of their life”; and
  • considers that payment can include the transfer of property or other assets or that the home can be any kind of private residence and is not confined to just a granny flat.

The Granny Flat Agreement

Whilst Centrelink/ Department of Human Services accepts that a granny flat interest exists without a formal agreement and there is no actual requirement for a formal agreement to be in place, it is prudent for all parties involved in a granny flat arrangement to reduce the agreement to writing and obtain independent legal advice. This can avoid any problems that may arise as time progresses.

At a minimum, a Granny Flat Agreement should address the following issues, noting there are many family law and succession issues mixed with elder law issues to consider, complicated further by blended families and other family dynamics:

  • What sort of interest is created by the Granny Flat Agreement (is it a life interest?);
  • What will be the consideration for the creation of the arrangements (i.e. what money will change hands)?
  • What will happen if the property is to be sold?
  • If the person in need of care has a number of children, will there be problems if the house is transferred to just one child as the care provider in exchange for care? What will happen with the Will of the person in need of care, is it creating a potential family provision claim against their estate?
  • Will it create a situation that lends itself to financial and/or elder abuse?
  • Will the carer be required to give up full time work and care for the person in need of care?
  • What will happen if the person in need of care needs to go into high level care in an aged care facility, particularly within the first 5 years of the agreement?
  • Does the person in need of care have security of tenure for their life?
  • Who will pay for the maintenance and upkeep of the property?
  • Who will pay for the utilities, including, but not limited to, electricity, gas, water, Council Rates, insurance etc?
  • What will happen if the adult child divorces and the house becomes part of a family law property settlement?
  • What will happen if the care provider dies or becomes seriously ill?
  • What will happen if the care provider becomes bankrupt?
  • What will happen if the care provider divorces and the home becomes part of a family law dispute between the care provider and their former spouse?
  • How will the agreement be terminated?
  • Who will pay the costs of the agreement?
  • Have all parties obtained independent legal advice?
  • Have all the parties had independent financial advice?

Assessment of Granny Flat Interest – the “Reasonableness Test”

Where the elderly person in need of care is in receipt of the pension, the Department of Human Services assesses granny flat interests to ensure that the transfer and assets meet the “reasonableness test”.

It is crucial for an older person in need of care to obtain advice from the Department of Human Services before entering into a granny flat agreement to ensure they will not lose their pension or other entitlements. The “reasonableness test” determines whether the person in need of care has deprived himself/ herself of assets when establishing a granny flat interest. If it is considered that the person in need of care transferred more than the value of the granny flat interest, the excess transferred is considered by the Department of Human Services as a “deprived asset”. The practical effect of this is that the elderly person who transferred their asset may lose their pension.

Note that if the person in need of care stops living in the home within 5 years (except for health reasons not anticipated at the time the granny flat interest was created), the Department of Human Services will deem that the home has been disposed of and this may also impact upon pension entitlements.

If the person in need of care is not in receipt of a pension, none of the above matters as to assessment by Department of Human Services will be relevant. However, the other family law and succession issues will remain relevant and serious thought should be given as to whether a granny flat agreement is a wise step for the person in need of care to take, noting independent legal advice should be sought by all parties to the transaction.

Conclusion

If you need help drafting a granny flat agreement, or advice on a granny flat agreement, do not hesitate to contact one of our experienced lawyers on 1300 544 755.

Emma Heuston

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