Earlier this year, we discussed recognizing the need for assistance with caregiving and avoiding caregiver burnout. When Mom or Dad are no longer able to live on their own or maybe they just don’t want to live in their own home anymore, there are lots of options short of going into a nursing home. Studies have shown that around 70% of caregivers of seniors are family members. Today we will be discussing these caregiving family members.
May be you or one of the other kids or one of the grandkids has offered to care for Mom or Dad. The caregiving family member is not going to do it for free. You are going to be compensated for the time that you are caring for Mom or Dad. Depending upon the amount of care needed, you could be spending substantial amounts of time with them, and may have even moved in with them.
Because Mom or Dad needs constant care, you may even have quit your job so that you can take care of them. To make up for your lost wages and to help out with expenses, Mom or Dad may want to “pay” you for caring for them. Each month when they receive their pension or Social Security, they will pay some over to you. After all, you did quit your job and you are working for them.
The likelihood is that prior to providing services to Mom or Dad, you did not properly document your agreement in a comprehensive written personal care contract. You also probably did not report the amounts that Mom or Dad paid to you on your income tax return as earned income. This would result in not only income taxes, but also the 15.3% Social Security and Medicare self-employment taxes.
If not properly documented beforehand, these payments to you would be considered gifts that are divestments for Medicaid qualification purposes to pay for long-term care in a nursing home. These divestments could result in a divestment penalty period if Mom or Dad applied for Medicaid to pay for nursing home care within five years of any of those payments.
Let’s say that Mom or Dad paid you $2,500 a month for the last 2½ years and now must go into a nursing home. To determine the divestment penalty period, you take the total payments of $75,000 and divide it by the $8,282 average nursing home cost in Michigan in 2016 and you have about an 9 month divestment penalty period. In this situation, Medicaid will not cover the first 9 months that Mom or Dad is in the nursing home. You and/or your siblings are going to have to private pay for those 9 months.
Do you have options other than this undesirable result? Yes you do and we will discuss a couple of them. Instead of paying you an amount monthly, Mom or Dad could just pay additional household expenses. Since there are no payments to you, there should be no gifts or transfers that are considered divestments.
You could enter into a properly documented personal care contract with Mom or Dad in which you agree to perform certain services for them in exchange for a monthly payment. In order for the payments on this personal care contract to not be considered divestments, there are a number of requirements.
One of these requirements is that the services must be performed after a written legal contract or agreement has been entered into between you and Mom or Dad. They cannot be paying you for past services. And they cannot pre-pay you for services to be rendered in the future. Payment must be after the services are rendered.
The monthly payment to you must be reasonable. But what is reasonable? You can ask home care service agencies what they charge for similar services. If the average for those types of services is $3,000 a month, then you could potentially justify charging Mom or Dad $3,000 a month for those services. That could be covered by Mom or Dad’s Social Security and pension.
Included in the contract are all the services you are providing such as room, board, laundry, dressing, feeding, toileting and any other assistance. In addition, these services that you are performing for Mom or Dad pursuant to the contract must be recommended in writing by Mom or Dad’s doctor before those services are provided by you. The doctor must state that those services are necessary to keep Mom or Dad out of a residential care or a nursing facility.
If Mom or Dad is not mentally capable of entering into a personal care contract, then the representative under a properly drafted financial power of attorney can enter into this contract on their behalf., so long as the power of attorney is not the caregiver. There are some additional requirements of personal care contracts which we will not discuss here today.
The good news is that these payments to you are no longer considered divestments and should not result in any type of penalty period when Mom or Dad apply for Medicaid upon admission to a nursing home. The bad news is that you must report all of the payments pursuant to the contract as earned income on your Federal, State and local income tax returns, and pay the requisite income taxes. In addition, you would also have to pay the 15.3% Social Security and Medicare self-employment taxes. There is no free lunch.
These rules are complicated and we have only touched upon some of them today. Do not try this on your own. It could result in months of Medicaid ineligibility and substantial nursing home expenses for your family. The best thing for you to do is prior to Mom or Dad paying you to care for them, consult with a knowledgeable elder law legal specialist who can assist you with Mom or Dad’s situation.
There are lots of homecare agencies which for a fee provide homecare services. If Mom or Dad are self-sufficient, they may want to move into an independent living facility where they don’t have to worry about the home maintenance, upkeep and expense. If they needed some help. they could move to an assisted living facility. If they need more assistance you may want to move them into an adult foster care home. We will be discussing these different options in upcoming columns.
By: Matthew M. Wallace, CPA, JD
Published edited April 17th, 2016 in The Times Herald newspaper, Port Huron, Michigan as: Do Homework Before Hiring Family caregivers