What happens to the granny flat if things don’t work out?

By 19 April 2017Wills & Estates
Granny Flat If Things Don’T Work Out

“Granny Flat” arrangements come in all sorts of shapes and sizes.

The traditional notion of an aged parent living in a bungalow in the back yard is only one such scenario. This usually occurs in circumstances where the parent lacks the financial resources to house themselves adequately and a child steps in to fill the void.

These days it is much more likely that the parent is asset rich but income poor and is looking for a way to secure their accommodation and receive care and assistance from their child.

These arrangements are sometimes characterised as “cash for care”, alluding to the fact that the child is likely to receive some financial advantage either at the time or in the future in exchange for caring for the parent.

The most transparent arrangement is for the parties to hold the property in question as tenants in common in proportions that reflect their relative financial contributions. The party’s shares are defined and can be dealt with in their Wills. If the arrangement unravels a trustee can be appointed for the sale of the property and the parties can receive their shares of the proceeds of sale.

Joint tenancy has some similar features but with one significant difference. The interest of one owner of the property passes by survivorship to the remaining owner or owners regardless of what might be written in a Will.

In the Victorian Supreme Court case of Daunt v Daunt [2015] VSCA 58 the parents owned their property as joint tenants. The mother transferred her share to one of their sons. The father then died and that son became the sole proprietor of the property. His brother applied to the Court to have the transfer reversed on the grounds of undue influence and unconscionable conduct. The Court however disagreed and dismissed the claim. It was clear from the evidence that the mother understood exactly what she was doing when she made the transfer and had sound reasons for doing so.

Another option is the long term lease and loan that is now quite common in many retirement villages. There is no reason why a similar arrangement could not be put in place in the family situation. As with a retirement village, this arrangement gives the parent security of tenure and access to their funds if they need to relocate or go into aged care.

The factor that most of these arrangements have in common is the intergenerational pooling of assets or transfer of wealth. That being the case it is of the utmost importance that all arrangements are clearly documented with the respective rights and responsibilities of all parties involved set out.

Ideally other family members would be involved in the discussions so that there is no suggestion that one child is taking advantage of vulnerable parents. If there is pre-existing tension within the family this might not be possible and in those circumstances it is all the more important to have the arrangement documented.

From the parents point of view the important things are security of tenure, the ability to retrieve funds if the arrangement sours, access to pension entitlements and provision for aged care.

There are a number of life events that can cause a Granny Flat Agreement to fail.

The most obvious is a falling out between the parties, but a marriage breakdown or one of the parties getting into financial difficulties would also call the arrangement into question. A properly documented Agreement that addresses these issues and provides for alternative arrangements to be put in place will certainly assist in avoiding costly legal proceedings if the arrangement fails.

The case of Pobjoy v Reynolds [2013] NSW SC 88 is an example of what can happen if the parties have a falling out and don’t follow through with the agreement. Although there was nothing in writing, the mother in this case was able to satisfy the Court that she had contributed over $100,000.00 towards the purchase of a property in her daughter and son-in-law’s name which had been sold.  The judge declared that an equitable trust existed and could be enforced as a charge against a replacement property that was in her daughter’s name.

If any of the parties are in receipt of Centrelink pensions, special care needs to be taken when preparing any agreement. Pension entitlements may be impacted by the transfer of assets from one party to another and could result in an unsatisfactory outcome. Advice should also be sought from a tax accountant to ensure that any Capital Gains Tax issues are addressed.

Finally parents need to consider how the arrangement fits with their overall Estate Planning and Testamentary intentions.

Whatever arrangements are going to be put in place the parents and children involved should definitely be obtaining independent legal and financial advice.

Article by: Ann Eagle