Intergenerational Planning Part 2: Implementing Granny Flat Arrangements

Welcome to the second and final part of our two-part blog series on granny flat arrangements. In our first blog, we explored what a granny flat arrangement is, how it can be beneficial for families, plus what to keep in mind when entering into one. In this blog, SE Lawyers Director Principal Melanie Heffernan delves into how Estate planning, family law matters, and financial difficulties can impact a granny flat arrangement, plus what implementing one can look like in real life. Read on. 

How granny flat arrangements can impact on Wills and Probate

When entering into a granny flat arrangement, both parties will need to be aware that any money or assets given to the adult child in exchange for the ‘granny flat interest’ may no longer form part of the parent’s estate. Essentially, this means that upon the death of the elderly parent, any property or money given to the child may not be distributed in accordance with the Will of the parent, and may be forfeited to that child. 

Here is an example: 

Margaret Thatcher is a 70-year-old woman. She lost her husband to COVID, and she has two adult children, Carol and Mark. Margaret’s daughter Carol mainly lives in the UK. Margaret is lonely living on her own, but she does not want to live in a retirement village. She has decided to ask her favourite child, Mark, if she could live with him. 

Mark recently got married to his partner, Taylor Swift. Mark and Taylor have two small children, who Margaret loves seeing and wants to watch grow up. Mark and Taylor like the idea that Margaret will live with them, but they want her to stay in a self-contained bungalow in their backyard, so that she has her own quiet space. 

Mark and Taylor told Margaret that they will be looking to buy a house with a bigger block of land near the Chirnside Park shopping centre. This will enable them to build a granny flat unit for her in their backyard.  

Margaret sold her own property in Croydon, whilst Mark and Taylor purchased a property with a bigger block. Margaret gave Mark and Taylor $300,000 to contribute to the purchase price of the property. Margaret also gave Mark another $150,000 for the building costs of the granny flat unit that she will live in.

In this scenario, if Margaret dies, the $450,000 she gave to Mark may not be included in her estate. This means her daughter Carol - who, like Mark is also a beneficiary of her Will - won’t be entitled to any part of the $450,000. If Margaret wants to ensure that Carol receives an equal benefit from her Estate, she will need to have a granny flat agreement that states that the money advanced to Mark is a loan. Alternatively, she can sign a Will that gives the first $450,000 of her Estate to Carol, which will take into account that Mark has already received $450,000 during Margaret’s lifetime.

How Mark’s separation may supersede a granny flat arrangement 

In the event of marriage breakdown between Mark and Taylor, the money paid by Mark’s mother for the granny flat interest ($450,000) may be included in the asset pool, unless properly documented. If the Court decides that Taylor will keep the family home, this will cause problems for Margaret, because she might not be able to recover her money or be entitled to remain in the granny flat itself. 

How financial difficulties or bankruptcy of the child can impact Margaret 

Another event worth considering is the scenario of either Mark or Taylor suffering financial difficulties, such as bankruptcy. In any event that this occurs, and if their property is seized by a Court order, Margaret will also likely lose the $450,000 she previously gave to Mark and Taylor for the granny flat interest, unless it is properly documented in an agreement.

How South East Lawyers can help you create the right granny flat agreement for your needs

Although granny flat arrangements can be an excellent way to remain close to your elderly parents - while still granting them independence - properly documenting your agreement and accounting for different scenarios is critical. At South East Lawyers, we take extra care in drafting our granny flat agreements. They include clear provisions that are appropriate to our clients’ circumstances and needs, and are in accordance with Australian Taxation Office rulings, Centrelink requirements and all other applicable laws. To discuss your suitability for a granny flat agreement, and receive advice from our professional, experienced lawyers, reach out to South East Lawyers below.