When to use Granny Flat arrangement and why?
I have been talking lots about savings, investing, super, Age Pension and retirement in general.
I have also written about Aged Care:
- The biggest Aged Care mistakes to avoid and
- each budget updates for the Aged Care industry.
But one of the most requested topics is about other forms of caring for older family members, and it is about Granny Flats.
Most people are very confused with this topic or are completely unaware that it exists, or what that actually is, for what purpose or how it could assist financially, personally and socially.
So today we will go a bit deeper into the Granny Flats arrangements, and we will discuss the following:
1. What is a Granny flat arrangement?
2. What assets can be used for this purpose?
3. Rules around Centrelink and Pension
4. Impact on tax and estate planning
1. The very first question is: What is this Granny Flat Arrangement? When it can be used and how helpful could it be and for whom?
When we talk about Granny Flats, we are not talking about the little cottage at the back of someone’s backyard.
What we are talking about is the financial arrangement between parent – one or both – and a child or children, where parent is provided with the accommodation and care for exchange for a payment or asset or money transfer to the care provider.
Therefore, we have a family agreement, where mum or dad or both together will transfer the asset, such as their family home or other property or money to a child or children to establish a “granny flat interest”.
Usually, that means that the life tenancy of a life interest in the property is being agreed upon between a parent, who is a care recipient, and a child who is a care provider.
A very good example are clients of mine, whose mother was getting older, lonely, wanted to live with children and grandchildren, while at the same time, children could look after mum, whose health started deteriorating.
But in order to accommodate mum and also that the family can continue their normal independent living, they needed to expend their home.
Therefore, mum sold her family home and contributed the money towards the extension, therefore money contributed to the build of the extension was agreed upon legally via a solicitor as a “granny flat agreement”.
This agreement has some Centrelink benefits for the pension calculations, however as always: it depends.
This is the area where you just MUST get the financial advice, as it is so very easy to create a huge drama for a parent of losing Age Pension, paying unnecessary taxes or introducing problems for the estate.
2. But assuming that your financial planner advised that Granny Flat interest is beneficial for all, what assets can be used to establish the agreement?
- As mentioned before, the parent family home can be used, either as a property transferred or after selling it as money
- Cash, meaning any other money a parent might have, which could also include shares, bonds or other financial assets.
3. Centrelink Rules around the Granny Flat
As always, Centrelink rules are complex. Normally giving assets to your kids or transferring the property falls under “assets deprivation” and I have been talking about it quite extensively throughout my videos. This is where the Granny Flat is different.
Under this arrangement you are allowed to “give assets to your children” and it will not be treated as deprivation, because it is an exchange of your money for the care and accommodation provided to you by your children.
Centrelink will however look at the value of the asset given away. As always there are limits, so again ask for advice, so you don’t go over those limits, and they are different depending on each case. If you don’t keep the arrangement within the financial limit, it might negatively impact the Age Pension entitlement for the parent.
Parent who is provided with care and accommodation, cannot own the property
The home in which the accommodation is provided, must be the parent’s principal home.
This type of the financial set up could assist in keeping the Age Pension, having a parent close by to look after him or her, money could help children in their financial planning, while the parent is also cared for.
4. But, as mentioned before, this strategy needs to be correctly calculated and many issues need to be taken into account:
- What is your parent limit for the granny flat contribution? As I said before, it is different in each case, so you better find out before you start setting things up not to go over the limit,
- What will be the impact of this arrangement on Age Pension or any other pension the parent is receiving?
- What happens if your parent’s health deteriorates? Where will the money come from for Age Care placement and ongoing fees?
- Do the parent have more than one child? What about estate planning, distribution of any death benefit to other children that don’t participate in the granny flat agreement?
- If there is a transfer of a property, is there any stamp duty, land tax or Capital Gains Tax payable in this situation?
As you can see, there are many issues to be discussed, researched and calculated before you can decide if a Granny Flan is really beneficial for you and your parent or not.
If this is something that could benefit your parent, or if you are a parent who would like to find out if this is viable option for your retirement, please visit my website AboutRetirement.com.au to organise a meeting with me, so we can view your situation and discuss it in more details.
By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement
