The Problems With A Granny Flat Agreement

It probably wouldn’t come as a surprise if a child of an elderly parent saw an opportunity to undermine the parental will via the building of a granny flat.
Is blood thicker than money?

It probably wouldn’t come as a surprise if a child of an elderly parent saw an opportunity to undermine the parental will via the building of a granny flat.

When money or other assets are transferred to children from a parent prior to death, good estate planning is crucial. It will likely be the only thing protecting the rights of the parent or estate beneficiaries.

Seeking advice up front may avoid the need for a costly legal battle later down the track. Consider it to be a small investment in estate planning that will benefit you largely in the future.

Granny flat agreements

A granny flat agreement is an informal arrangement between a parent and their adult child, recognising the parental contribution of funds to build or renovate the granny flat which is, or effectively will be, in the name of the child. In return, the child agrees to provide the parent with a lifetime right to live in the granny flat.

The elderly parent is likely to jump at the chance to enjoy the love and support of having their family close by as they age, even despite potential objections from other children.

Problems and pitfalls
  • Parents generally do not consult a lawyer due to issues of cost, affection, trust or ignorance. and that is even before considering situations where the child is trying to divert assets away from siblings.
  • Centrelink may recognise granny flat arrangements, but if the paperwork doesn’t ‘stack up’, they can treat it as a gift, hence reducing an age pension entitlement.
  • If the parent has advised a financier (in writing) that the contribution is a gift to help the child obtain finance, this document could impact Centrelink entitlements or the parents’ ability to recoup the money through the courts.
  • If the parent doesn’t have testamentary capacity when this wealth transfer occurs, it could very well be too late to document the transaction in a Will or create a power of attorney.
  • Issues will arise if the parent needs access to their capital to fund entry into a nursing home. This may require the child to refinance to obtain the money to repay the parent, or even sell the house. We have been enjoying a period of ‘free money’, but this will not always be the case. 14% interest rates are not out of the question, and a recession will hit property prices.
  • If the parents’ marriage breaks down and one parent wants their share of the matrimonial asset returned but it is invested in the granny flat. This will generally result into a case for the family law court.

Without proper advice, who is going to ensure that the interest of all parties are fairly protected?

It’s fortunate that our courts are not clogged and cases are resolved on the spot rather than taking years to finalise at a large financial and emotional expense.

When the relationship sours, the only chance of recovery may be to go to court… but what if a bank has been told that the money was a gift. What if the parent is suffering dementia or is suffering a serious medical condition and it is up to other children to reclaim the money or a Legal Personal Representative (LPR) upon death and there is no supporting documentation?

How does the LPR (after the death of the parent) prove that the contribution was not a gift but that the parent contributed funds as part of an arrangement that the parties would live together. Potentially worse still what if the child is the executor of the parents’ will.

There are many questions and possible issues that could surface with a granny flat agreement.

Possible Solutions
  • Having a financial power of attorney in place now will reduce the risk of one child taking advantage of the parents.
  • Ensure that the one child is not both a financial power of attorney and medical decision maker.
  • Have an up to date Will that lists the granny flat contribution and clearly identifies the parents intentions and estate wishes.
  • Prepare a statement of wishes to clarify the parents view and wishes.
  • Consider if there should be a loan agreement or a second mortgage over the property.
  • Seek professional advice so all parties can have a chance to decide what they want to happen if the parent suffers a physical or mental impairment.

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