Family caregiver planning has some simple rules…
And some not-so-simple rules.
For starters, any caregiver agreements involving family members should be in writing.
That is, unless the person providing the care is being altruistic (being a friend), and expects nothing in return now or in the future.
Often when one family member provides care for another, there usually is some agreement about compensation.
Sometimes the caregiver is paid directly and on a regular basis.
Other times there is an agreement that the caregiver will receive an increased share of the estate, some property, or a lump sum.
In these situations, a written caregiver agreement ensures there are no misunderstandings, everyone in the family knows the terms, and tax benefits are maximized.
An agreement is important in every case but is especially important when the caregiver has siblings.
When a family member cares for another and there is a financial payment of any sort, the payments are not tax-free gifts.
Any payments are compensation for services and must be included in the gross income of the recipient.
This is true whether the payments are made periodically like a salary, in a lump sum, or as an additional inheritance.
It is also true if the payments are in cash or some other form.
The agreement is also especially important if the person cared for hopes to qualify for Medicaid nursing home coverage someday.
Medicaid is available only to people with incomes and assets below certain levels.
Gifts made in the five years before the Medicaid application are added to the person’s net worth to determine if the asset limit is reached.
But compensation for personal care paid to a relative is not considered a gift by Medicaid if the payments are made under a caregiver agreement that was written in advance and the compensation amounts are reasonable and at arm’s length.
The written agreement also helps avoid IRS finding that the transfers were gifts.
Gifts above the annual exclusion amount are taxable or reduce the lifetime gift and estate tax credit.
A caregiver agreement, also known as a personal service or personal care contract, should have a number of elements.
The duties of the caregiver should be specified. Spelling out the details is a way of proving the compensation is reasonable and reducing misunderstandings over services to be performed.
Typical services include preparing and serving meals, making sure medication is taken, keeping the house clean and maintained, paying bills and running errands.
There needs to be an agreement over which tasks will be personally performed by the caregiver and which will be performed by others but arranged and supervised by the caregiver.
It must be clear who will pay for third party services.
The amount of compensation must be stated, as well as the frequency and form of payment.
The compensation should be reasonable and based on the average hourly rate charged by others in the locality for similar services.
There can be a family discount from the market rate but not a premium. Some family members want only to be aid for their out-of-pocket costs plus a small amount for their time. That is fine but should be stated clearly.
The compensation has to be reasonable based on the caregiver’s skills. The hourly rate for a registered nurse, for example, cannot be used for someone without the credentials.
Many states assume that services performed by a family member are gratuitous.
Without the writing, the family might not be able to obtain reimbursement from some government programs and, in the worst case, the person providing care and receiving compensation might be accused of stealing or financial abuse.
The payer of the compensation might be required to withhold and report Social Security and other taxes.
Additional Family Caregiver Planning Rules
The recipient should report compensation as gross income. The details of the agreement will determine if the caregiver is an employee or independent contractor for tax withholding and reporting purposes.
The agreement should be discussed with other family members for input and to avoid misunderstandings.
Putting the agreement in writing and making sure it has the essential elements reduces the tax and family problems that frequently arise from haphazard and informal agreements.