Monday, November 16, 2009

Estate Planning Tool: Using "Caregiver Contracts" For Family Members Who Take Care Of Elderly Relatives

In prior posts, I have discussed minimizing the risk of probate litigation between family members. Such disputes often arise when parents or relatives decide to leave unequal inheritances to the beneficiaries, sometimes to reward the person who has taken on significant family caregiving duties.

Studies show that nearly 25 percent of adult Americans provide long hours of voluntary care for older or sick family members and friends. These numbers are likely to grow as the population ages and more people live longer. According to an AARP study, family caregivers provide more than 20 hours of care a week and the average length of time spent providing care is 4.3 years. Many caregivers must balance family duties with their day jobs with many having to make adjustments to their work life, including taking time off for doctor appointments or even giving up their jobs entirely.

The October 21, 2009 online edition of the Wall Street Journal had an article on this topic entitled "Getting Paid To Take Care Of Mom Or Dad" which raises the increasingly common idea of families entering into caregiver contracts or arranging payment for care. The article is at:

These payment arrangements are increasingly becoming a part of estate planning. Rather than leave uneven inheritances for their heirs, those that need care are sometimes entering into formal "caregiver contracts," in which adult children or other relatives are hired, for modest salaries, to take care of elderly or disabled family members.

These arrangements, also called personal-service or personal-care agreements, help reward family members for the significant amounts of time, effort and money they often spend taking care of an elderly relative. They also can help reduce the size of a person's estate and may prevent battles between siblings and other family members. As I often emphasize, communication with other siblings or relatives about these contracts is important in order to help minimize family tensions later.

There's another key reason for this arrangement. It is more difficult to qualify for Medicaid/Medi-Cal long-term-care coverage where there have been outright gifts to family members. The rules preventing outright gifts are meant to prevent seniors who have the means to pay for their own care from obtaining Medicaid/Medi-Cal, which is intended for poor patients.

However, if set up properly, caregiver contracts shouldn't be considered gifts to children because the patient is receiving a real service in return. Medicaid isn't likely to disqualify a senior for making those payments to his or her children or relatives if you there is an arm's length, commercially reasonable contract, in writing, ahead of time.

To establish that the contract is commercially reasonable, 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 payment of bills, household management, preparing meals to arranging doctors appointments and driving for social outings. Depending on the services provided, the pay can range from $15 per hour to $100 per hour. Some families choose to pay a discounted rate to family caregivers, which is also acceptable.

As with all estate planning documents, it is preferable 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/Medi-Cal-planning-- or in regular weekly or monthly payments. It's also prudent to create safeguards to prevent a caregiver from taking the money and not performing the services, such as depositing the upfront lump sum payment into an escrow account to be paid over time.

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.

At the same time, the estate planning attorney and family should research 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. This is the time to see if you already have a policy or whether you should consider obtaining one. The coverage may allow you to pay family members for their caregiving services.

Where appropriate, we generally set up these contracts as part of a more-comprehensive estate plan, including power-of-attorney documents, trusts and pourover wills, but where there is an existing trust, it can be reviewed and amended to provide for this caregiver arrangement.

Posted by Henry Moravec, III. Should you have any questions regarding your own situation, you can e-mail Hank Moravec at hm@moravecslaw.com or call him at (626) 793-3210. The firm website is http://www.moravecslaw.com/