Mum is building a granny flat in our backyard. Do we need to draw anything up?

FamilyA Granny Flat is typically a self-contained unit within or attached to another home, often with the intent that the elderly resident can be close to family and help if required.

For social security purposes, a granny flat arrangement does not necessarily require a separate residence – it just needs to be owned by someone else and you need to have established a “granny flat interest” (that is, a lifetime right to reside in someone else’s property arising from the exchange of assets or money).

It is important to distinguish a granny flat interest from a mere gift – there are various restrictions under social security legislation for gifting to family members (no more than $10,000 in a year unless they are given a granny flat interest).

How do you create a Granny Flat Interest?
There needs to be a transfer of assets to the owner of the property in exchange for a life tenancy or interest in the property. For example:

  • you can transfer the ownership of your home to someone else (e.g. a family member), but keep a lifetime right to live in the home;
  • you can transfer some of your other assets (e.g. money) for a lifetime right to live in a property owned by someone else (e.g. a family member).

We will all live together harmoniously – won’t we?
Whilst it would be nice to think that living together will remain harmonious, there are a number of unforeseen issues that could arise. Consider the situation where an elderly couple sell their family home and invest the proceeds of sale in the construction of a granny flat at the back of a property owned by their daughter and her family. What would happen if:

  • the daughter and her husband divorce, thereby requiring the property to be sold? What return will the elderly parents receive? Just the cash contribution they made, or will they receive the benefit of any appreciated value because of market forces?
  • the daughter passes away, leaving her interest in the property to her surviving husband?
  • the relationship between the elderly parents and their daughter breaks down?
  • one or both of the elderly parents becomes so ill that they require constant care and are unable to continue living unassisted?

Many “family agreements” arising from a granny flat arrangement are unclear, informal and not written down. This of course creates difficulties should an issue (such as those identified above) arises. It is therefore recommended that all parties involved confirm the granny flat arrangement in writing, paying particular attention to possible scenarios that may arise.

Grandparents having a picnic with grandchildren

Family Agreements

As much as the family members concerned feel uncomfortable with having to resort to legal documentation to reflect their arrangement, having the arrangement and each family member’s intentions solidified in writing will avoid any conflict down the track should an issue arise.

Courts in the past have stated: “the best way to take precautions and avoid such outcomes is to carefully consider the risks and the options and then to commit the agreement to writing, preferably with the assistance of a lawyer”.

Informal agreements pose hurdles when challenged

The trust that usually exists in family relationships often leads to arrangements between family members, even major financial ones, being made on an informal basis. This can cause problems when disagreements arise or one family member dies and the arrangement has to be proved in court.

An unfortunately clear message from the many recent court cases arising from disputed informal family arrangements is that the people involved are among those least likely to seek legal assistance to put important understandings in writing until it is too late.

In one case, a young farmer thought he had an arrangement with his father that he would be left a 10-acre farming block of land on the father’s death. The father encouraged that belief by comments he made to others. The son relied on his assumption or expectation of inheriting the farm and made a major life and career choice to stay in the country as a farmer and continue to work the block of land. However, after the father’s death, it was discovered that his will did not reflect the arrangement he had made with his son. The farm was not left to him and he had to go to court to pursue his claim that he had suffered detriment by reason of the expectation not being fulfilled in the father’s will, because his career choices could not be redressed.

In another case, a young man and his wife-to-be were looking for a house to buy. This would be their marital home. The young man’s father bought a house and said to them: “I’ve bought you a house. This is your house.” The young couple moved in, paid all the outgoings and $200 per week to the father. They also spent significant money making improvements to the property in the expectation that their home was later to become legally theirs. However, the father reneged on the deal, later asserting that the couple had merely been renting the house. The young couple had to go to court to try to enforce the promise made by the father.

Other cases have involved relationships between in-laws, estranged spouses, siblings, aunts and uncles, and in one very high profile case, a deceased’s one-time mistress.

Arrangements put in writing with proper legal advice can avoid disputes arising in the future.

Contact Melissa Lammers on 9526 3444 or mlammers@shirelegal.com.au if you have any questions about granny flat arrangements.

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