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"Remember to ask - Am I increasing my net worth?"
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RETIREMENT LIVING
Pressure is growing on retirees as their numbers grow at a faster pace than the facilities available for them. The logical move for many is to shift in to a retirement village when the upkeep of their own home becomes too much of a burden, but there is a shortage of retirement village accommodation for those of limited means. For these people, the option of moving into a granny flat in the home of one of their children is a serious alternative. In most cases the cost will be much less, and they can enjoy the company of their children and grandchildren in their later years.
While this is appropriate in many cases, there are many factors besides obtaining local government approvals to be considered before the move is made.
First is the effect on their pension. Usually the grandparent will sell their home and use part of the proceeds to pay for the renovations necessary to build the granny flat. Provided the money used for renovations does not exceed $90,000, Centrelink will regard the renovation money as if it was used to purchase another home and the money spent on renovations will not be assessed under the income and assets test. However, if the renovations cost more than $90,000, Centrelink may treat the excess money as a deprived asset and assess it for the next five years.
Of course, the house will probably sell for more than the cost of creating the granny flat and the extra capital freed up may cause a reduction in pension. A good financial adviser can usually rectify the loss in pension in these circumstances without too much trouble, but it is much simpler if the financial adviser is consulted BEFORE the family home is sold. Then potential problems due to loss of pension can be addressed at an early stage.
Next is sibling rivalry. Unfortunately the happiest of families can start bickering when money raises its ugly head, and the prospect of grandma spending $50 000 or more on one sibling's home can create cries of "foul play" from some of the other siblings who see one family member getting more than their fair share of the estate. Logically you would think the sibling who is prepared to take responsibility of looking after the grandparent ad infinitem would be entitled to a larger share of the estate, but it is better to have a round table discussion about it while family members are still talking to each other.
Next is the issue of pets. The grandparents are certainly not going to want to leave their much loved dog or cat behind, but the question must be asked as to how the pets will fit into the new household. Old dogs tend not to get on with old cats and the sight of the family dog killing grandmas' cat is not likely to get the relationship off to a good start. If there are several pets there are also local authority regulations to consider, as there is generally a restriction n the numbers of pets a household can have.
And what if granny doesn't have the money? Then it's gets interesting. If you borrow the money and don't charge rent, you can't claim a tax deduction for the interest. On the other hand, if you charge rent, and it must be a market rent, you can claim the interest and some of the ongoing costs. The problem with option two is that you lose some your CGT exemption and may find yourself liable for tax on part of the capital gain if you sell the house.
Resist the temptation to sell the grandparents' car on the grounds that they won't need one when they move. They will need their independence as much as you. But, be prepared for frustrations if you have don't have extra car accommodation and you have to move their car every time you want to use yours.
Clients who have gone down the granny flat route tell me the hardest part can be amalgamating two households into one. Granny may love trees, you may hate them; granny may want to rise at dawn and go to bed at 9, the kids may want to sleep late and party till after midnight. And mother and daughter in the same kitchen or laundry can lead to tension. There is also the matter of sharing expenses such as rates, water and electricity and what is expected of Gran in the baby-sitting department.
None of this is major stuff, but discussing it from the outset can prevent tears later. After all, what could be worse than granny moving out after a few months and asking for her money back? You can't' chop the granny flat off and sell it to raise the money to pay her.
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