Most people don’t realize that if you just pay a friend or family member for helping you out, Medicaid will treat the payment as a transfer for less than fair market value and it will cause an asset transfer penalty. The presumption is that any family member providing care is doing so for free and any payment, therefore, is a gift. Medicaid looks back 5 years and adds all the gifts together during that time to figure out how much of a penalty period to assess. The more that’s gifted away, the higher the penalty period.
Take this example: An elderly woman pays her daughter to care for her in her home. She pays the daughter $1,000 a month for help with getting around, cleaning, bathing, etc. She’s able to do this for four years before she needs to go into a nursing home. The daughter has helped her stay in the home longer than she would have otherwise and, in most cases, usually provides much more help and care than what she was being paid for.
But now mom is in the nursing home and her money has run out. She applies for Medicaid. Medicaid looks at all the transfers between the mom and the daughter and adds them up. They come to $48,000. When they apply the penalty formula, they say that the mother is ineligible for Medicaid assistance for 8 months. She has to privately pay for that period of time or the daughter has to give back the money.
Remember, no good deed goes unpunished.
Medicaid viewed the transactions as gifts because they lacked a crucial element: a properly drafted and executed personal service contract.
A Personal Service Contract (abbreviated “PSK” since a contract in law is abbreviated with the letter “K”) is also known as a Personal Care Contract.
These care contracts are established between a person in need of care and a friend or loved one who provides the care. The upside is that if the care contract is in place, the Medicaid department will treat the payments as fair market value transactions, assuming the cost of care being paid for is reasonable.
Some critical issues to remember:
Most care contracts must be prospective. That is to say that the care contract must be in place before payment can be made. In many instances it’s best to use a time card or payroll service to track actual hours of care and payment. While the contract must be in place in advance of payment, there’s nothing to say that payment has to be made as services are rendered. Often contracts are set up to double as an IOU between the caregiver and the caretaker. The caretaker racks up a large bill and waits for payment later when the caregiver has more liquidity.
Care must be paid for at a reasonable rate. This usually requires an assessment of the local non-medical home care rates. To be safe, a rate that is less than the going local rate is preferred. If a higher rate is paid, Medicaid may look at the overpayments as gifts but are more than likely to treat the entire transaction as an improper transfer − triggering the stiff transfer penalties.
One of the reasons that payments between family members are treated as a gift for Medicaid purposes is that most people getting paid treat them as a gift. What they fail to do is report the funds on their income tax returns. Care recipients often fail to properly report the care being paid for or treat the caregiver as an employee or independent contractor, as appropriate. If the funds paid for care are not a gift, then they are income to the caregiver and must be treated accordingly.
Most states will not allow for the prepayment of care. In other words, you have to pay for care as it is rendered or any excess payments will be treated as gifts for the purpose of determining transfer penalties. In some states, like Florida, it is possible to pay for care in advance through a lump sum personal service contract. This creates a great mechanism to shift excess resources and adequately compensate family members for care. However, as the previous paragraph mentions, this can cause a rather large taxable event for the caregiver. This technique can be coupled with a special annuity that can help spread the taxable income over the term of the contract.
Personal Service Contracts are often used to justify the care expense portion of the VA Aid & Attendance benefit. The VA does not have nearly as strict requirements as most state Medicaid departments do concerning the payment of care, the execution of the care contract, or the taxation of care payments. A person may meet the rudimentary threshold of the VA to get the Aid & Attendance benefit, but when their care worsens and they need Medicaid assistance they find out that Medicaid’s stricter requirements should have been followed.
Our team stays abreast of the most current developments in Personal Service Contracts and can help guide you if you should need assistance or direction with setting up a personal service contract or instituting Medicaid-compliant reporting plan. For more information contact: [email protected].