Granny flat arrangements may seem like a simple idea, but the implications are complex and filled with traps.
As parents age and need more support, families may decide to move in together and create a granny flat arrangement. This can allow generations of family members to support each other, as well as provide financial benefits.
For an older parent this may offer a great care solution, but not every family can successfully navigate the pitfalls. You may need to remove rose-coloured glasses to ensure you objectively consider the family dynamics as well as the financial implications.
What is a granny flat arrangement?
Granny flats usually conjure up images of a small flat in the backyard but arrangements can take many forms.
Social security legislation uses the term “granny flat right” to define a transfer of property or money, in exchange for a promise of accommodation for life. This transfer might be to cover expenses, or just to say thanks. For example, a parent transfers title of their home to a child in exchange for a promise to allow the parent to continue to living in the home, or a parent gives a child money in exchange for an invitation to move into the child’s home.
If set-up properly, the parent might be able to transfer assets to a child without creating a deprived asset. This may help to maintain age pension entitlements or reduce future aged care fees. But the rules can be complicated, which is why advice is important. Reducing your assets is not always a good long-term decision.
What can go wrong?
Relationships can break down and families may find it is not so easy to live together. This may see the parent left without money to pay for alternative accommodation if they need to move out. And if a move into aged care is required, choices may be limited without assets to pay the published accommodation costs.
Risks can also arise if the child faces their own financial difficulties resulting from a divorce, bankruptcy, legal action, gambling problem or other addiction or breaks the promise to look after the parent.
You might think not my family, but so did other families who ended up in bitter legal disputes.
How to minimise the risks?
There is a saying that money and families don’t mix, and the truth of this often becomes evident when granny flat arrangements are proposed.
A carefully written legal document setting out the terms of the agreement and what is to happen if things start to fall apart, might provide a level of protection for everyone involved but it is not a silver bullet that will avoid all problems.
Don’t make rush decisions, and everyone involved should access independent legal and financial advice to fully understand the implications.
– Fowler’s Financial Planner, Amanda Golder
Listen to our Aged Care Podcast as the Wealth Radar boys pick her brain and find out how she can help you and your family make those tough decisions that need to be when it comes to Aged Care.