How to Deal With Granny Flats in Estate Planning

With the first of the “baby boomer” generation now hitting their 70’s and many going into retirement mode, indications are that there will be a huge impact on the provision of aged and community care in Australia. According to an article in Health Times (http://healthtimes.com.au) in 2015, Australia had about 2,800 residential aged care facilities providing care to more than 160,000 elderly people, and over the next ten years the number of residents is projected to reach more than 250,000, with the highest area of growth being among residents aged 95 or over.

Indeed, in 2013 Leading Age Services Australia predicted there will be a shortfall of 66,000 home care places by 2050 and that 83,000 new nursing home places will be needed over the next nine years. Plus, even if you are lucky enough to find a place, according to Aged Care Crisis (ACC) there are no mandated minimum staff/resident ratios in aged-care homes across Australia. The Aged Care Act 1997 merely requires that there must be “an adequate number of appropriately trained staff”.  As a consequence of this lack of required standards in staffing, it is suspected that facility managers who are under pressure to meet their profit targets may do so by reducing staff - placing vulnerable residents at risk.

No wonder retirees are increasingly looking to building granny flats (either in their own or in their kids’ backyards) as the solution to their retirement accommodation and aged care needs. According to state government statistics, as of the beginning of 2016, nearly 100 granny flats were being completed each week in Sydney alone - a threefold growth in five years.

In particular, “granny flat interests” are treated favourably for Centrelink age pension assessment purposes. In this regard, a person establishes a granny flat interest when they exchange assets or money for a right to live in someone else’s property for as long as they live. Centrelink’s position is that they do not use market value to assess the worth of a granny flat interest. Instead, it is considered to be worth the value of the assets transferred or paid if your client:

• transfers the title of the home they live in to someone else and keeps a lifetime right to live in that home or in another home - this applies if their home was or would have been totally exempt from the assets test;
• pay the costs associated to build a granny flat on someone else’s property or the costs to convert someone else’s property to suit their needs and establish a lifetime right to live there; or
• buy a property in someone else’s name and establish a lifetime right to reside there.

Also, provided they pay in one of these ways and do not transfer additional assets as well, no deprivation will occur.

Now, it doesn’t take a mathematician to quickly work out that, especially in the Sydney property market, transferring a typical million dollar Sydney shack to the client’s child in return for the right to live there for the rest of the parent’s life (especially if they’re already into their 80’s) seems to be giving them something potentially worth a lot more than the parent’s right to live there with them until they shuffle off this mortal coil.

And there’s the rub, isn’t it? By giving their house to their child (or one of their children) or buying a house for them in return for the parent’s right to live there, the parent may be able to achieve a three-fold purpose:

• incentivising (presumably) the recipient child to look after the parent in their “twilight years”;
• passing on some wealth during their life to the “lucky” child concerned; and
• without any adverse impact on the parent’s age pension entitlements.

Seems like a pretty “win-win” solution to the aged care predicament?

Until, perhaps, you start to think about the impact of the arrangement on the parent’s estate planning. Whilst there would presumably be no issue (pun intended) if the child to whom the parent transferred the house or for whom they bought a house was their sole heir, complications may arise where there is more than one child and the value of the relevant home represents a significant proportion or even the bulk of the value of the parent’s entire estate.

Let’s say the client has three children (Bart, Lisa and Maggie), and they (the sole surviving parent) decide they would like to have Lisa look after them for the rest of their life. So the client agrees with daughter Lisa that the client will transfer their house to her for the right to build a granny flat in the backyard and live there for the rest of the client’s days. Otherwise their Will simply states that when they die their estate will go in equal shares to their children.

Now, if the client ends up living for another 20 years and Lisa looks after all their needs and pays for their living and medical expenses right up until death, that may be seen as fair and the other two children may not object.

But what if the client only lives another 2 years? And what if the house represented 90% of the value of their estate?

Well, the client could say that “when I’m gone the kids can work it out”.  They sure will – and quite possibly with the assistance of the Court! Clearly the client’s other two children are eligible persons who can make a claim against their estate under the family provision laws (and in NSW in particular, there is the ability to “claw back” the house into the estate under the so-called “notional estate” rules in s 80 of the Succession Act 2006 (NSW) by unwinding the transfer to Lisa if it occurred within three years prior to the date of the client’s death - or longer if “special circumstances” under s 90 can be shown.

However, with a bit of “pre-emptive” estate planning, your client can leave a legacy other than a civil war among their children. For instance, in this situation where the home is the major asset of the estate, your client might enter into a deed of agreement with Lisa (and perhaps including the other two children as parties as well) before transferring the home to her to say that if the client lives for less than a certain number of years, Lisa will hold the property on trust for sale for herself and her siblings, in proportions which could vary on a sliding scale from an equal three ways (if, say, the client died within a year) to her holding the home solely for herself (if the client died after, say, 20 years).

If the house is not the major asset of the estate (or of the client’s “overall wealth”) there may be other options available to equalise the treatment among the children, such as directing the client’s super to their other two children under a non-lapsing binding death benefit nomination, or nominating the other two children as successor appointors of the family trust.

In each case, the client could also write a “memorandum of wishes” that explains the strategy they have put in place to their children so that they understand the strategy and not seek to challenge the arrangements anyway. There’s also no reason the family couldn’t meet at the time and discuss the issues with the adviser’s help so that general agreement could be reached and none of the children were surprised by the outcomes.

Arrangements like these to handle aged care issues are squarely within the role of a good financial planner and the estate planning issues are considerable.  Helping clients in these areas not only binds the adviser to their client and the client’s family but is a fertile source of fee-for-service.

Visit the SUPERCentral product range if you would like more information on estate planning.

For further information or specific technical questions please contact us on 02 8296 6266 or email us via info@supercentral.com.au.