Don’t let a granny flat arrangement wreck your retirement Senior financial adviser and aged care specialist Craig Phillips explains where you could go terribly wrong when considering a granny flat arrangement.
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he granny flat has been around for years and can be a completely viable living option for a family member or loved one who needs a little extra assistance and no longer wants to live by themselves. A granny flat arrangement can offer a level of independence and a real alternative to retirement villages, and can be more attractive than permanent residential aged care. If you did a quick poll on the street and asked what people believe is a granny flat, you’re likely to get a few different answers and, surprisingly, there are a few more meanings than you may think. A granny flat is typically considered to be a self-contained unit either attached to a home or in the backyard. A granny flat interest, as defined by Centrelink, is a bit different as Centrelink is concerned with what type of agreement for life has been established – not so much a description of the real estate.
If family relationships break down, you may find the life interest you’ve been granted is no longer honoured. Legal action may then be required to have it enforced. If, later, you need to move to residential aged care, you may not have sufficient assets to pay for entry.
Anyone considering granting a granny flat interest … must have a specialist lawyer explain and document the agreement.
Centrelink considers a granny flat interest as one where someone ‘pays’ for a life interest or life tenancy, and the life interest or life tenancy is in a private residence that will be the person’s principal home. Until legislation passed in June, many families were reluctant to document the changing of money as it likely meant a possible unwanted immediate capital gains tax event for the recipient of the gift. This was leaving the older person in a vulnerable position should it not work out or the owner of the property suffers an event such as divorce, bankruptcy or a legal claim. The house may be at risk as it could form part of that person’s assets, which then become available to creditors or as part of divorce settlements. 16
Anyone considering granting a granny flat interest by handing over money or titles must have a specialist lawyer explain and document the agreement. You will need to consider that you will lose control over these funds, as ownership will now be controlled by another person.
This may restrict your choice and access to what you consider ‘appropriate’ care. If you are working through this with your financial planner and he/she isn’t across the aged care landscape, it’s important you find someone who is. It’s a complicated area and it’s easy to make a mistake.
If a need to move to residential aged care is reasonably foreseeable within the next five years, it’s possible that the granny flat interest could still be counted as an assessable asset owned by you when determining how much you need to pay to enter care. You should discuss your individual circumstances with your local Centrelink/Department of Veteran Affairs office and/or seek advice.
How is a granny flat interest valued? The value of a granny flat interest is the amount paid or transferred by someone if they: • transfer the title of their home to a person and receive a life interest in return, or • pay for the construction of accommodation on another person’s property and receive a life interest in return, or • purchase a property in another person’s name in return for a life interest.
YourLifeChoices Retirement Affordability Index™ November 2021
