Often a person making a financial power of attorney appoints two or more persons to act jointly.
Granny flat agreements
Family care agreements
We are a Victorian based legal firm but the information on this page has applicability to all States of Australia as the law is not State based.
Who will be interested in the information on this page?
Anyone considering providing accommodation and/or care in their own home for an elderly parent, or parents.
Anyone considering providing accommodation and/or care in their own home to any person.
Any parent considering the possibility of entering into a granny flat arrangement with a child (or other person).
Anyone who is experiencing difficulties with a granny flat arrangement.
Overview: What are family care agreements, family agreements and granny flat agreements?
Family agreements, family care agreements, granny flat agreements, and other similar phrases are generally used to describe arrangements in which one or both parents are provided with accommodation and care in the home of a child.
The care and accommodation is usually provided by the child in exchange for some payment, and sometimes the transfer of the parent’s home. Sometimes the parent will provide funds for a granny flat to be built at the child’s home.
Depending on the level of care that might be required, sometimes the child will give up work in order to provide the care.
The principal idea behind these arrangements is that the parent can continue to live at home with loved ones for a longer period than might otherwise be the case.
Because significant lifestyle changes can be involved by both parents and children, and the exchange sometimes of large amounts of money, legal and financial difficulties can arise if these arrangements are not carefully planned.
Accordingly, in this article we seek to emphasise that these arrangements should not be entered into lightly. We also seek to emphasise the importance of each party to the transaction obtaining independent advice and having the arrangement reduced to writing.
It is particularly important for the elderly person to obtain independent legal and financial advice given that so much is at stake, and to prevent the possibility of financial abuse occurring. An elderly person will not usually be able to recover their financial position if things go wrong.
But these arrangements do not always involve relatives or elderly people – the importance of the Centrelink/pension rules
Centrelink uses the term “granny flat” in its website material but goes on to make it clear that these arrangements do not necessarily involve parents or relations, and do not necessarily involve what we generally consider to be a granny flat – a separate self-contained part of a home where a parent or parents can live. Moreover, a granny flat arrangement so far as Centrelink is concerned does not have to include any care provisions – the arrangement can simply be for accommodation, and can be for a person of any age.
The Centrelink rules about granny flats are concerned about lessening the effects of the gifting rules (deprivation rules) which would otherwise potentially involve consequences for the amount of pension a person is entitled to receive.
Because Centrelink/pension issues are so important we will separate the next part of the discussion into:
- arrangements where pensioners enter into accommodation/care agreements, and
- arrangements involving non-pensioners
Family care/accommodation agreements involving pensioners
It is absolutely critical that financial advice is obtained from an appropriate expert (or the Centrelink Financial Information Service – a free advice service).
The Centrelink rules are designed to facilitate these arrangements being entered into, in the sense that they ameliorate the gifting/deprivation rules which can otherwise have adverse effects upon pension entitlements. However, the rules are quite complicated and if an arrangement is entered into without proper consideration of these rules, it is likely to be very difficult to undo damage that might be done.
In short, monies can be advanced by a parent to, say, a child to enable the parent to live in the home of the child, without that advance being regarded as a gift for Centrelink purposes. In general, and the detail of the rules must be carefully looked at in each particular case, the advance of monies for this purpose by the parent will not affect the pension as long as the advance is not greater than required to properly create the “granny flat” accommodation. Anything in excess of what is required for the granny flat itself can be regarded as deprivation/gifting, and the pension entitlement can be adversely affected. This is a simplification of the rules.
The other important aspect of the Centrelink “granny flat” rules is that a “granny flat interest” must be created. This means that an agreement must be reached, say, with a child, that in exchange for the advance of money by the parent that parent must be given either a life interest in the property or a right to accommodation for life. This does not mean that the child cannot sell the home, but it does, strictly, mean that alternative accommodation must be provided so that the arrangement can continue.
This emphasises the fact, if nothing else, that such arrangements must be very carefully considered and a long-term view taken of them. Unfortunately these family agreements/granny flat agreements have sometimes ended up in the courts and this is usually due to the participants not adequately considering all of the consequences at the start.
As will be stated later in this article, these arrangements should be the subject of a written agreement between the parties, with each party having separate legal (and financial) representation. Although this will involve some expense at the start, it may well prevent far greater expense (and anguish) later on.
Two other aspects of the Centrelink rules in relation to granny flats is that the person being provided with accommodation and/or care cannot own the property that they are going to reside in and the home in which the accommodation is provided must be the person’s principal home.
Family care/accommodation agreements involving non-pensioners:
Where pensions are not involved, granny flat/family care agreements are more straightforward. Obviously none of the Centrelink rules about gifting/deprivation apply, and the parties can enter into any arrangement that they consider best without having to take into consideration gifting and other asset considerations that might affect pensions.
However, the need for the parties to the arrangement to be clear about what they are doing in the short and long-term applies equally. This again points to the need for the arrangement to be very carefully considered and to be put in writing, ideally with each party having separate legal representation.
It must be remembered that although family agreements and granny flat agreements often include agreements for the care of the parent, this does not necessarily have to be the case. Arrangements may just be for the provision of accommodation.
The need for care!
Unfortunately these arrangements can break down and sometimes end up in court.
This almost always occurs because, first, the arrangement and its consequences are not thought through at the start, and, second, the arrangement is not put into writing so that everyone is clear about exactly what the arrangement is.
Perhaps we can add a third – every family member that should be consulted about the arrangement is not consulted, and may know nothing or little about it. Because one child might receive an advantage over another, or even a perceived advantage, it is important that all relevant family members are included and know about what the intended arrangement is.
Although it is often difficult for parents and children to enter into a legally binding agreement, it must be remembered that these arrangements (this list is by no means exhaustive):
- are intended to be ongoing for long periods of time
- involve substantial assets
- place restrictions on the children (usually) who are providing the accommodation in relation to what they can do with their property
- can involve difficult questions in relation to pensions
- involve issues relating to inheritances/the possible favouring of one child over another
- may involve a child giving up work to provide care and the sacrificing salary potentially over a long period of time
- have to take into account what may happen in the future when the parent can no longer live in the home for health reasons
- may lead to financial and other abuse of elders
- should provide for what happens to assets if the relationship breaks down
- should provide for what happens if children divorce/separate, become bankrupt or simply do not want the arrangement to continue
Given this, and the myriad of other issues that can arise, it is considered prudent to enter into a written agreement, and for all potentially affected family members to “sign off” on the agreement – not because they are all direct parties to the agreement but because it is important for them to acknowledge having seen and understood the arrangement.
Many of the organisations and bodies representing the rights of elders, including Seniors Rights Victoria, strongly recommend entering into formal agreements for these granny flat and family care arrangements.
Legal advice and specialist financial advice go hand-in-hand:
Solicitors are not usually qualified to give financial advice. It is accordingly very important that family agreements and granny flat agreements be prepared by the solicitor in close consultation with a financial adviser.
There can be all sorts of financial implications, including, as mentioned above, Centrelink pension issues, but also other issues in relation to Centrelink asset tests, taxation and capital gains tax implications and stamp duty implications. Also, children who are providing care and who may give up employment to do so, often require appropriate financial advice.
An example of a family care agreement:
There is no such thing as a typical family care agreement, they all vary depending upon personnel involved, assets, the kind of care (if applicable) that will be required, and many other things.
The following is an example of an agreement prepared by this firm – in summary form:
An elderly widower (we will call him “John”) was living in his own home with his daughter, who was working.
John was a full pensioner.
John was getting to the stage where he was requiring more and more assistance with his daily living needs, but wanted to remain at home for as long as possible.
He agreed with his daughter to transfer his home to her in exchange for her agreement to provide him with care for the rest of his life, or for as long as she could practically provide such care.
Centrelink’s Financial Information Service was contacted and advice received that the arrangement would not affect John’s pension.
The daughter had a sufficient superannuation pension to enable her to give up working, and the security of the interest in the home gave her the financial incentive to provide the care she agreed to give.
An agreement was drawn up to reflect these agreements, and John’s other child, a son, signed off on the agreement. The agreement also provided that the home could be sold if that became necessary to fund a bond at an aged care facility, or if both John and his daughter wished to move to another location and/or move into a smaller home.
Provisions were included to protect John in the event that his daughter no longer wished to provide care, or could not provide care, or became bankrupt.
John made a new Will to provide that his two children were equally provided for, taking into account the value of the care that was being provided by his daughter.