Caregiver Agreement

CAREGIVER AGREEMENT

AS TECHNIQUE IN LONG-TERM CARE PLANNING

In General

Definition of "Caregiver Agreement."

A caregiver agreement (sometimes referred to as a "personal care contract" or "personal service contract") is typically a written contract entered into by an elderly person needing care (or his or her agent, guardian, or other fiduciary) and the caregiver (usually an adult child or other family member), in which the caregiver agrees to render services to the elderly person in exchange for the payment of money and/or other consideration.

Advantages for Elderly Person.

For the elderly person, the primary advantage of such a contract is that it will allow them to be cared for at home rather than in an institution. (However, the caregiver could also agree to provide services to the elderly person even if the latter is placed in a nursing facility.)

Also, if the caregiver is one of several children of the elderly person, paying reasonable compensation for the caregiver’s services at the time they are rendered is a better solution than deferring payment until after death by leaving the child a disproportionately larger share of the estate.

There is a risk that the value of the larger share will prove to be significantly more or less than the reasonable value of the services performed.

The unequal treatment of the caregiver in the elderly person’s Will may lead to allegations by the other children that the caregiver-child took advantage of an elderly parent.

Advantages for Caregiver.

For the caregiver, the advantage of having such a contract in effect is that it will provide a reliable source of income as compensation for their services. This avoids the resentment that can build up when a child is devoting his or her time to such care, perhaps sacrificing other income-earning opportunities, without receiving any type of compensation.

Caregiver Agreement as Part of Medicaid Planning.

    In addition to the standard advantages discussed above, a caregiver agreement can also be part of a strategy for accelerating Medicaid eligibility for an elderly person. If the agreement is properly designed and the parties carry out its terms, payments made to the caregiver under the contract can help reduce the elderly person’s countable assets, which in turn will accelerate Medicaid eligibility.

    Since the payments by definition will be made in exchange for services rendered, they will not be treated as gifts, thereby avoiding application of the look-back rule and other restrictions on gifting.

ELEMENTS OF A CAREGIVER AGREEMENT

    Given that the caregiver agreement will likely be examined critically by several parties, including other family members, the Department of Public Welfare ("DPW") in connection with a Medicaid application, and perhaps even the IRS when assessing its tax effects, it is important that the agreement be drafted in anticipation of the issues that may be raised by all such parties.

    First, any such agreement should be in a writing that is executed by the parties before any services are provided.

    Among the issues that the contract should address and clearly define are:

What are the duties to be performed?

A detailed description of the services to be provided to the elderly person in the home should be included. In addition, the duties of the caregiver could be defined during any period when the elderly person is residing in an assisted living, skilled nursing, or other type of medical or nursing care facility.

What is the legal (tax) relationship between the elderly person and the caregiver: Employer - Employee or Independent Contractor?

Based on the duties performed under the typical caregiver contract, the IRS will likely consider the caregiver to be an employee.

In such event, social security and other payroll taxes will need to be withheld. A payroll service can be used to ensure that these details will be correctly handled.

What is the amount of compensation to be paid?

Payment should be clearly defined either as a set amount, or an amount to be determined by an agreed-upon hourly rate that will be multiplied by the hours worked.

Reasonable Compensation. To avoid a later challenge to the contract payments on grounds that they are at least partially a form of disguised gifts to the caregiver, it is essential that the amount of compensation be reasonable.

The best way to establish reasonableness is to base the compensation on what home-care agencies or other independent caregivers charge for similar services in the same locale.

The factors used to determine the amount of compensation should be memorialized in a writing, for later use as evidence in the event of a challenge. Also, if the compensation will be based on the number of hours worked, detailed time logs should be maintained by the caregiver.

What will be the method and frequency of payment?

Payments can be made either in:

Periodic payments (e.g., weekly, bi-weekly, or monthly), or

Lump sum paid upon the execution of the contract.

NOTE: Lump sum payment is often used when Medicaid eligibility is a goal, as discussed below.

.

When will the contract terminate?

What must either party do to effect a termination?

Is advance notice required before the effective date of termination?

Escrow of Lump Sum Payment of Compensation.

    If the lump sum payment method is chosen, it may be safer to have the payment made to a third-party escrow agent, who in turn would hold the money and make payments in installments to the caregiver. This will eliminate the risk of the caregiver receiving full payment up-front and then not rendering the services, or of the elderly person later becoming incapacitated and thus unable to make future installment payments.

    An open-ended "annuity type" model can be used for determining periodic payments under an escrow arrangement, i.e., the caregiver agrees to render services for the duration of the elderly person’s lifetime, whenever that event may ultimately occur. In exchange, payments to the caregiver are made in installments over the elderly person’s life expectancy, which will be recalculated annually. (Recalculation ensures that the escrow account will not be fully spent prior to death).

Disposition of Escrow Account at Death. An important issue to be addressed in an escrow arrangement is the disposition of the funds still held in escrow at the elderly person’s death. Under the annuity model discussed above, the caregiver typically will be entitled to receive any balance remaining in the escrow account, in consideration of the open-ended nature of his or her obligations initially assumed under the contract, rather than the funds being paid to elderly person’s estate.

    From a Medicaid perspective, the payment of funds held in the escrow account to the elderly person’s estate would likely trigger the Medicaid estate recovery rules (discussed in the topic below), which in turn would require the estate to pay over the funds to the DPW as necessary to reimburse the state for all Medicaid payments that would have been paid on behalf of the elderly person.

INCOME TAX EFFECTS OF A CAREGIVER AGREEMENT

Limitation on Deductibility of Payments.

Under HIPAA, the costs of providing "qualified long-term care services" for a "chronically ill individual" are deductible as a medical expense. Qualified expenses are deductible whether provided in a facility or in a private residence. Since "qualified long-term care services" includes "maintenance and personal care services" (if provided pursuant to a plan of care prescribed by a licensed health care practitioner), payments made to a caregiver under a caregiver agreement may be deductible as a "medical expense" by the elderly person.

However, the deduction is not permitted if the caregiver is the elderly person's spouse, lineal descendant, brother, or sister.

Payments as Taxable Income to Caregiver.

Payments must be reported by the caregiver as taxable income.

Income Tax Treatment of Escrow Arrangement.

What is the income tax treatment of funds paid into an escrow account, if that is established as part of the caregiver agreement?

Under the Internal Revenue Code, a cash method taxpayer must attribute items of gross income to the taxable year in which they are either actually or constructively received.

If the caregiver agreement provides that the caregiver will ultimately receive all of the funds in the escrow account, with no portion of the funds refundable to the elderly person or to his or her estate, the caregiver will have to treat the entire fund as taxable income in the year it is paid into the escrow account, even if his or her actual receipt of the funds may be deferred for several years.

To avoid application of this "constructive receipt" rule, the caregiver agreement would have to provide both that:

Payment for services from the escrow account would not be made until earned; and

Any unearned portion of the fund would be refunded to the elderly person or his or her estate at the termination of the agreement.

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DISCLAIMER

Martin J. Hagan is licensed to practice law in the Commonwealth of Pennsylvania. This website is intended solely for informational use and is not intended to solicit clients. Likewise, any information contained in or obtained from this web site is for informational purposes only and is not intended to be used as legal advice.

IRS CIRCULAR 230 DISCLAIMER: Pursuant to Treasury guidelines, any tax advice contained in this website (or any link from it) does not constitute a formal opinion. Accordingly, any tax advice contained in this website (or any link from it) is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be asserted by the Internal Revenue Service. You should seek advice based on your particular circumstances from an independent tax advisor.

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Last Updated: 03/05/10