With property prices higher than ever, many older home owners are keen to help their children into the market.
As far as Centrelink is concerned, there are three ways you can transfer property to your kids, and one way you can't, if you want to stay eligible for the age pension.
Enter the increasingly popular granny flat arrangement.
Granny flats may conjure up images of box-like sheds in the backyard, but more frequently it's a room in a house, maybe even the master bedroom.
The main adjustment is a financial one. The parent or parents are no longer the owners; they've transferred the home into their child's name.
In return, the adult child agrees to look after their parent into old age and provide them with a home. The next generation takes on the responsibility for bills and home maintenance, while grandma or grandpa may look after the grandkids as part of the bargain.
Centrelink is OK with this arrangement, says information officer Justin Bott. It means the former home owner would still qualify for the pension and public aged care if it is needed later on (they have no assets, after all).
Granny flat arrangements are not connected with the tightening of the eligibility rules for the age pension. However, they may become more popular if superannuation means tests eventually include the family home, and Prime Minister Malcolm Turnbull has said all options are on the table.
Three ways you can granny flat ...
1. Complete transfer of title
In this scenario, mum or dad puts the home into the name of their adult child in order to pay for a "granny flat interest", which means they have the right to live there for the rest of their life. There may be a formal legal requirement.
This strategy is particularly effective if the elderly parent can no longer afford to look after the house and wants to give their child a bit of a leg up in the property market, while keeping the pension.
So long as the exchange of assets is deemed fair by Centrelink, it should not affect pension payments. However, if Centrelink considers the arrangement to be an uneven exchange – for instance, if it thinks the parent "overpaid" – they could be penalised based on a "reasonableness test".
For a 65-year-old, the top reasonable amount for board and care would be around $600,000, according to financial planner Adam Faulkner, of Sentinel Wealth, but for a 75-year-old it would drop to around $400,000.
2. Constructing a new property
Many people think of this as the traditional granny flat arrangement. Ageing mum may have an enormous home and yard, but is too frail to look after the lawn and garden. So instead, she pays to construct a second property on her land to live in, while her daughter or son and their family take over the house.
3. Everyone sells
One way of bringing adult kids and their parents geographically closer together is by each selling up and buying something together, but putting it into the child's name.
Say you own a house in Parramatta but your mum's in Avalon, or you're in Meadow Heights and your dad's in Toorak; you could theoretically buy a bigger home for all of you to live in at a halfway point, without sacrificing your pension. Again, Centrelink must perceive your purchase as reasonable.
... and one way you can't
Blindly handing over your home as a "gift" to the next generation is a big no-no by Centrelink if you want to keep your pension. It is deemed to be very different to the three granny flat arrangements listed above, because it's not seen as a fair deal for either the older party or the public purse.
"The key to the granny flat arrangement is it's an exchange and not a gift," says Bott.
You are currently allowed to gift just $10,000 a year – or $30,000 over five financial years – without affecting your pension payments. Any more and Centrelink may think you are trying to dilute your wealth to keep your government entitlements.
Where it can all go wrong
While it may sound like the perfect arrangement, there are some definite red flags around granny flatting.
If you've got multiple children, it's worth keeping in mind you are essentially putting their inheritance into the name of one child only. What will happen after you die? You could keep a portion of the property to bequeath to your other children, but would that mean your co-dwelling child has to sell the home when they die? These questions need to be resolved before you proceed.
"Speak to a solicitor and include your siblings in the conversation," advises Faulkner.
What happens if you or the family doesn't love living with mum or dad, or vice versa? It's worth factoring in an exit clause in case things go awry.
The other thing to be mindful of is you and your family would have limited say in aged care, should that become a reality. Because you have no assets to meet the aged care accommodation payment, you could end up last on the list for location preferences.
Granny flatting may be great for some families, but it's certainly not a one-size-fits-all solution.
"Ask yourself, are we doing this for the right long-term reasons, or doing it as a means to an end? Debt is a short-term problem, but a life interest can be a 30-year commitment," says Faulkner.
