Aged care and granny flats come with their own rights
A granny flat is an ideal solution for many families with ageing parents who are not ready for the nursing home, but it’s not always simple. Little is known about the ‘Granny Flat Right’ and its financial and legal implications.
When most people hear the words “aged care” they think “nursing home”. This is normally quickly followed by the words “Not me!” Aged care decisions, whether they are for yourself or a loved one, are complex and the choices are far more diverse than simply stay at home or move into an aged care facility.
This article is the first in a three-part series examining the different legal and financial arrangements that people enter into – sometimes without realising – in meeting their need for care.
“Mum’s happy in her own little granny flat” sounds like the perfect arrangement, with Mum or Dad or both enjoying their own private space within a property occupied by an adult child who is close at hand to help. But such an arrangement embodies significant legal and financial implications that can impact the cost of residential aged care if required down the track.
Many people think of a granny flat as a small self-contained unit built in the backyard or semi-detached to the main home. However, a granny flat and with it a granny flat ‘right or life interest’ can also be established within an existing home. Often this occurs when a parent moves in with their children and the children modify the home to enable the older person to receive assistance and move around safely.
What is a ‘granny flat right’?
A granny flat right is typically an arrangement made in a family where accommodation is provided in exchange for a payment or transfer of assets. Under social security laws, individuals can transfer assets in excess of the gifting limits in exchange for a right of occupancy in a residential property.
There are generally three ways in which a granny flat right or life interest is established:
The parents sell their home and pay for a self-contained unit to be built on the children’s property or cover the cost of modifications to the existing home.
The parents remain living in their home and have the children move in to provide companionship and care and transfer the title of the home to the children.
Both the parents and the children sell their existing homes and purchase a new home in the children’s names.
Note: If the parents retain or have ownership of the property, a granny flat right or life interest has NOT been established.
The amount someone pays for a granny flat right will determine their homeowner status and whether the amount paid is exempt for pension purposes. It will also determine their eligibility for rent assistance. If the amount paid is less than $146,500 , they are considered a non-homeowner, the amount paid would be assessable and they may be eligible for rent assistance. The opposite is true if they pay more than $146,500 – they are deemed to be a homeowner, the amount paid is exempt and they would not be eligible for rent assistance.
If the former home is sold and exchanged for the granny flat right, then pension entitlement would remain unchanged as the asset position remains the same. If the proceeds from the sale of the home and other assets are used to purchase the granny flat, then pension entitlement would likely increase. However there are limits and once exceeded the amount above the limit will be treated as a gift.
How much is too much?
Generally speaking the amount paid for a granny flat right or life interest is considered to be the market price. This is because they are family arrangements and it can be difficult to place a value on them. However, a reasonableness test will be applied if:
Someone transfers the title to their home (or purchases property in another person’s name) and transfers additional assets.
Someone pays for the cost of construction and transfers additional assets.
It is considered that the person is establishing a granny flat right to gain a social security advantage.
The reasonableness test amount is calculated by multiplying the combined annual couple rate of the pension (on the date the right was established) by the relevant conversion factor. The relevant conversion factor is available from Centrelink and will depend on the age of the person (or the youngest member of the couple) next birthday. For example, the relevant conversion factor for someone who is 79 next birthday is 10.25, and the reasonableness test amount is 10.25 x $33,488 = $343,252.
Complexities often overlooked
While the idea of the family looking after their ageing members is certainly not a new concept, the complexities of such arrangements are often overlooked. What will happen if the children wish to go on holidays? What will happen if the parent’s care needs change and they cannot be safely looked after in the home? Who should pay for the cost of care? Will the parent make a contribution to household expenses such as food, utilities and insurance? Of course if the living arrangement continues for many years it may be necessary to consider what the consequences would be if the adult children divorce or if one of those caring for the parent became ill or passed away. While the obvious answers to increasing care needs may be to seek assistance through care packages, respite stays or even permanent residential aged care, often these options have never been discussed and contradict the parent’s expectations.
Because in many cases the purchase of the granny flat right is coming from the sale of the family home (or the transfer of the home) disputes often erupt amongst siblings who, although happy to concede that they are unable or unwilling to look after their ageing parents, have a vested interest in the family home as the largest asset in the future estate.
For people who think that residential aged care will be required in the future it is important to be aware: if someone needs to vacate a granny flat within five years of establishment for a reason that could have anticipated at the time the granny flat right was established, the value of the granny flat right can be considered a deprived asset. This means that both the asset value and the deemed income can be assessed for determining the accommodation payment and the means tested care fee payable to the aged care facility.
Rachel Lane is the Principal of Aged Care Gurus and oversees a national network of financial advisers dedicated to providing quality advice to older Australians and their families. You can read more about Granny Flat Rights and Life Interests in the book “Aged Care, Who Cares; Where, How and How Much?” by Rachel Lane and Noel Whittaker.
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