By Jack Halpern, MPS, LNHA.
Warning: Please
don’t try this at home by yourself. Caregiver contracts may have serious legal
and tax implications. For a professional in your area write to
jhalpern@myelderadvocate.com
As people get older, they often hire people to perform services for them, such as housekeeping, cooking, driving, paying bills and personal care.
As people get older, they often hire people to perform services for them, such as housekeeping, cooking, driving, paying bills and personal care.
But what’s new is that a lot of seniors are hiring their own children. They’re signing contracts with the children specifying what services will be performed and how much the children will be paid.
It’s not that children don’t love their parents and wouldn’t help them anyway, but these contracts can have significant estate planning benefits.
A growing number of families are setting up caregiver contracts, in which relatives are formally hired to take care of elderly or disabled family members. These new arrangements, which can also be called personal-care or personal-service agreements, can help to reduce the size of a parent's estate. They can also minimize battles between siblings and various family members. And for many other families, these contracts can help compensate for the huge amounts of time, effort and money that family members all-too-often often spend watching over and taking care of an elderly relative.
Still, there's stigma to overcome when recommending the idea to families. The
main reason: Some people can still be uncomfortable with the idea of paying
their own kids, say lawyers, and many folks choose to use long term care
insurance coverage, instead of trying to fake their way onto the Medicaid
welfare roles.
There aren't any national statistics on how many family members are compensated for caregiving. But a huge swath of Americans already provide long hours of voluntary care for family members and friends -- and these numbers are likely to grow as the population ages and more people live longer. Some 44.4 million adult caregivers -- or 21% of the U.S.
adult population -- provide unpaid care to seniors or adults with disabilities, according to a 2004 study by the National Alliance for Caregiving in Bethesda, Md., a research and advocacy coalition, and AARP, the Washington advocacy group for seniors. On average, those caregivers provide 21 hours of care a week; the average length of time spent providing care is 4.3 years.
Recent changes in the law have made it harder for parents to qualify for Medicaid by giving significant assets to their children. But generally speaking, if you give assets to children under a services contract, this won’t disqualify you from Medicaid.
Medicaid isn't likely to "disqualify you for making those payments to your children if you have an arm's length, commercially reasonable contract, in writing, ahead of time," says Charles Sabatino, director of the American Bar Association's Commission on Law and Aging in Washington. Scott Solkoff, a Boynton Beach and Miami, Fla., elder-lawyer, says he has drafted more than 250 caregiver contracts in recent years; about half of the arrangements, he says, have been "Medicaid-driven."
Still, there's a lot of stigma to overcome when recommending the idea to families, lawyers say. The main reason: "People are still uncomfortable with the idea that you are paying your kids," says Palo Alto, Calif., lawyer Michael Gilfix.
Indeed, when Ms. Richert first heard about the contracts from her mother's
lawyer, A. Frank Johns of
Advisers and family members say the deals are also smart because a formal arrangement, done ahead of time, can minimize feuds among siblings and other relatives. Oftentimes, one child serves as a primary caregiver and a parent may reward him or her by making informal gifts or by doling out a bigger piece of the estate in the will. Unfortunately, those arrangements can lead to family fights or will contests.
A formal caregiver contract, drafted ahead of time, makes the arrangement "more iron-clad," says New York elder-law attorney Bernard Krooks. "You have a written document showing this is what mom wants you to do and what mom wants to do for you. It helps avoid family squabbles." But lawyers say it's important to discuss the contract with other siblings or relatives so they are aware of the arrangement ahead of time; that can help minimize family tensions later.
Terry Huffines, of Brown Summit, N.C., set up a caregiver contract with her aunt, who is 92 years old, to help avoid any estate problems down the road with her aunt's 15 additional nieces and nephews. The agreement, set up by Mr. Johns, the Greensboro, N.C., lawyer, outlines the services Ms. Huffines, 72, will provide for her aunt, including driving her to the doctors, the grocery store and other household chores.
In order for a caregiver contract to be respected -- and to pass muster with Medicaid authorities -- it has to follow certain formalities. For one, you can't pay the caregiver an inflated rate in order to shift lots of money out of your estate. Instead, you should specify what duties the caregiver is expected to perform and then contact local home-care agencies or geriatric-care managers to establish the market value of those services in your area. Such duties can vary from preparing meals, bathing and dressing to housecleaning and chauffeuring, as well as arranging doctor's appointments and friends' visits and overseeing medications.
Peace in the family
When one sibling takes primary care of the parents later in life, it can lead to family tensions – either because the caregiver resents the other siblings for not helping more, or because the parents reward the caregiver with gifts or special bequests, which make the other siblings resentful. Such stresses can lead to hard feelings, disputes or even a will contest. Compensating the caregiver through a contract can head off this type of problem.
How much should a caregiver be paid? This can depend on a lot of factors. A good way to start is to make a list of what the caregiver will do, then contact some local home-care agencies and see what they charge for similar services.
Parents might be tempted to pay a family caregiver much more than the “market” rate, because this would enable them to get more money out of their estate. However, this is usually not a good idea because the government could challenge the contract – and the tax savings – and claim they’re not legally valid.
Some parents arrange to pay a caregiver a single lump sum up front based on their life expectancy. This can be a good way to get money out of an estate quickly. However, the parents will want to consider what would happen if the child, who has already received the lump sum, fails to provide the care that has been promised or becomes unable to do so. (For this reason, some parents pay a lump sum but put it into an escrow account.)
There are some downsides to these contracts. For one, the money paid to the caregiver is “income,” and the child must pay income tax on it. And in some cases, the parents must withhold Social Security and other payroll taxes.
Of course, some people just feel funny about the idea of money changing hands for the care of a family member. But again, it’s not that the child wouldn’t provide these services anyway. The contract is really just a method – like any other good estate planning vehicle – of enabling parents to provide as well as possible for the child in the long term.
Cost Varies Widely
The cost of care varies widely, depending on location and the services being performed, and can range from about $15 an hour to more than $100 an hour. Some families choose to pay a discounted rate to family caregivers, which is also acceptable, lawyers say. It's also much better to set up the caregiver contract when the incapacitated adult is of sound mind, as the arrangements can become far more complicated if a person acting as power of attorney signs the contract.
The contract should also specify whether the payment will be done in one upfront lump sum based on the senior's life expectancy -- a technique often used for Medicaid-planning --or in regular weekly or monthly payments. It's also wise to create safeguards to prevent a caregiver from taking the money and running, such as depositing paychecks into an escrow account rather than to the caregiver directly.
There are also tax consequences to consider. The compensation is considered ordinary income, so the caregiver has to pay income taxes on the payment. Also, depending on how the contract is structured, Social Security and other payroll taxes may have to be withheld.
Many lawyers say they generally only set up the contracts as part of more-comprehensive estate plans, including power-of-attorney documents and wills, but that the arrangements can cost anywhere from about $500 to several thousand dollars to create.
It's smart to check whether there are other sources of funding you can use to pay family members. Some long-term-care insurance policies, such as those that pay lump-sum "indemnity" benefits, may be used to pay family members who provide care, says Jesse Slome, executive director of the American Association for Long Term Care Insurance in Westlake Village, Calif. If you already have a policy or are considering one, see if the coverage will allow you to pay family members for their caregiving services.
In addition, some state or federal government programs provide funding to compensate family members in what is known as "consumer-directed care." For instance, a growing number of states have a "Cash & Counseling" program for Medicaid enrollees that allows participants to pay family members for their services. Contact your local agency on aging or department of social services for more information on government funding.
