Mom or Dad can no longer live on their own and you have decided to take them into your own home to live with you. Your home doesn’t have enough room so you decide to add a bedroom and a handicap bathroom to make life easier for Mom or Dad. You don’t have the money to do the remodeling, but Mom or Dad does. You use Mom or Dad’s funds to do the remodeling.
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 decides to pay you. Each month when they receive their Social Security and pension payments, Mom or Dad makes a payment to you.
After a short period of time, say 2 or 3 years, the care for Mom or Dad’s needs is more than you can provide. Mom or Dad now needs round-the-clock, 24/7/365 supervision. Mom or Dad have to go into the nursing home, but have no money left to pay for it because they spent it all on the remodel or in payments to you.
This scenario occurs on an all too frequent basis. Unfortunately, if you do not consult with an elder law legal specialist prior to moving Mom or Dad into your home, you can have unintended results. In the situation described above, Mom or Dad has no money to pay for nursing home expenses, but there could be a substantial period of time in which Medicaid would not cover the nursing home expenses because of the payments made to you.
When Mom or Dad paid for the improvements to your home, those payments were essentially a “gift” to you. That gift to you may be a divestment that will disqualify Mom or Dad from Medicaid to pay for nursing home expenses for a period of time. Let’s say the improvements cost $30,000. When Mom or Dad enter the nursing home within 5 years of the improvements, that $30,000 gift to you would be considered a divestment. That divestment would result in a divestment penalty period.
To determine the divestment penalty period, you divide the $30,000 divestment by the average nursing home cost in Michigan which is $6,618 in 2010. This would result in a 4½ month penalty period. You and/or your siblings would have to private pay Mom or Dad’s nursing home expenses for 4½ months before Medicaid would pick up Mom or Dad’s nursing home costs.
What about the payments from Mom or Dad directly to you? The likelihood is that you did not properly document your agreement in a comprehensive written personal care contract that was approved by Mom or Dad’s doctor. You also probably did not report the amounts that Mom or Dad paid you on your income tax returns as earned income which would result in not only income taxes, but also the 15.3% Social Security and Medicare self-employment taxes. If this is the case, those payments by Mom or Dad to you are also considered divestments which would result in a divestment penalty period.
Let’s say that Mom or Dad had paid you $2,000 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 $60,000 and divide it by the $6,618 and you have a 9 month divestment penalty period. When Mom or Dad applies for Medicaid, 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? You do and we will discuss a few of them. One option is instead of Mom or Dad moving in with you, you move in with Mom or Dad. If Mom or Dad needs to remodel their home because of the larger household, she or he can do so without incurring any penalty because it would be just making an improvement to their home. And instead of paying you an amount monthly, Mom or Dad just pays the household expenses. Since there are no payments to you, there are no gifts or transfers that would be considered divestments.
But what if you don’t want to live with Mom or Dad in their home. You want to live in your own home. You have lived in it for 20 years, it’s comfortable, it’s your home and you don’t want to move. You still have options.
One of these options is to have Mom or Dad sell their home and then have them purchase an interest in your home, so that your home is also Mom or Dad’s home. When Mom or Dad make improvements to the home, they are making improvements to their own home and consequently the payments would not be considered a divestment which would trigger a penalty period. Upon Mom or Dad’s admission into the nursing home, their interest in the home would be an exempt asset. Also, instead of making monthly payments to you, Mom or Dad could use their funds to pay for household expenses because they would be paying expenses for their own home.
But you shouldn’t put Mom or Dad’s name on your home if they can’t sell their home. Mom or Dad can only have one home that is exempt for Medicaid purposes. In that case, Mom or Dad could loan you the money to do the improvements to your home in exchange for a Medicaid qualifying promissory note. In this note, you pay Mom or Dad equal payments for a period of time that is shorter than their Michigan Department of Human Services published life expectancy.
You could then enter into a properly documented personal care contract with Mom or Dad in which you agree to do certain services for them in exchange for a monthly payment. Included in the contract are all the services you are providing such as room, board, laundry, dressing, feeding, toileting and any other assistance.
The monthly payment to you must be reasonable. But what is reasonable? You can ask adult foster care homes 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 and even all or part of your promissory note payments.
In order for the payments on this personal care contract to not be considered divestments, there are a number of requirements. One of the 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.
In addition, the 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. There are some additional requirements of personal care contracts which we will not discuss here today.
The good news is 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.
Medicaid qualification rules are complicated and we have only touched upon some of the rules 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 you providing any services to Mom or Dad or having someone move into the other’s home, consult with a knowledgeable elder law legal specialist who can assist you with Mom or Dad’s situation.
If you want to keep Mom or Dad out of a nursing home by caring for them in their own home or in yours, you can. And you should be able to do so without creating any burdensome penalties if Mom or Dad eventually do enter a nursing home.
By: Matthew M. Wallace, CPA, JD
Published edited July 4, 2010 in The Times Herald newspaper, Port Huron, Michigan as: Caring for aging parents tricky