The National Council on Aging (NCOA) and the American Association of Retired Persons (AARP) have conducted studies that conclude adult children of older parents are providing dramatically more care to their parents and they are making significant financial sacrifices to do so. Elders are typical of all Americans; they abhor unfairness and do not want to see their life’s savings go down the drain just because they had the bad luck of needing to be in a nursing home.
Parents who have family members providing for their personal care needs should consider executing an employment contract (Care Contract) with the children who are providing them services. Payment would be made to home healthcare professionals if their children were not there to help. Financial transfers made under a “caregiver agreement” generally are not considered gifts. There are at least three reasons for clients to consider a care contract:
1. Tax Planning: If a parent has a taxable estate, paying for personal services is one means of reducing the size of the estate. Monies paid to the child would be “taxable income” reported in the year it is paid.
2. Medi-Cal Qualification: Payment for personal services can be part of a “spend-down” when a Medi-Cal application may be submitted in one’s future. Depending on the amount of services rendered, this could justify $2,400 or more per month when care and support are very substantial. Taking income tax considerations into effect, funds used for payment of services might otherwise have to be invested in payment for a nursing home at a private rate.
3. Familial Reward: Children and other family members often devote themselves to the care of an aging, ill parent. They sometimes do so at great personal and financial cost. It is neither disloyal nor disrespectful to ensure payment as one form of reward or acknowledgment.
To minimize the chance either IRS or Medi-Cal will challenge the legitimacy of the employment arrangement, a detailed, written employment contract setting forth the employment arrangement is strongly recommended. Medi-Cal will want to characterize any payment as an uncompensated transfer to deny eligibility unless written proof of payment and proper taxes are paid on the earnings. It is always helpful to seek legal assistance in executing any plan of compensation.
Ms. Macdonald’s practice is limited to Estate Planning, Probate and Elder Law. Ms. MacDonald maintains her practice in the Santa Clarita Valley at 27013 Langside Avenue, Suite A in Santa Clarita. She can be reached at 661-251-1300.