The United States Tax Court just held that a New Jersey estate may not deduct a child’s charges for long term care provided to a deceased parent absent a written agreement by the parent to pay the child for the care. Estate of Olivo v. Commissioner (U.S. Tax Ct., No. 15428-07, July 11, 2011) http://www.ustaxcourt.gov/InOpHistoric/OLIVO.TCM.WPD.pdf. The estate claimed the child and parent agreed orally that the estate would pay the child for extensive long term care the child provided over many years. While the Tax Court acknowledged the child provided the care, the child’s law practice suffered dramatically as a result of devoting so much time to the parent’s care, the parent needed the care, and the care had substantial value, the Tax Court held that absent a written agreement, the estate didn’t satisfy its burden to prove the existence of a binding obligation to pay for the care.
The estate also couldn’t deduct the value of the child’s services in quantum meruit, whereby a quasi-contract may be inferred where it would be inequitable to deny payment to a person who confers a benefit on another. Essentially, quantum meruit allows a plaintiff to recover the reasonable value of services that are accepted by the recipient of the services and provided with a reasonable expectation of payment. However, New Jersey’s Supreme Court has held that services by family members residing in the same household are presumed to be provided for free and the estate lacked evidence to overcome the presumption. Waker v. Bergen, 132 A. 669, 669-670 (N.J. 1926).
One piece of good news for taxpayers was the Tax Court’s willingness to allow deductions for statutory commissions to an estate personal representative that haven’t been approved by a court. The Tax Court also indicates that an estate may deduct properly documented attorney fees paid to the personal representative in accordance with New Jersey law.
The moral of this case is to document through written agreements at the earliest possible date all payments to family members that are intended to be tax deductible. However, be careful because the family member providing services must treat the compensation as taxable income that generates state and federal income and payroll tax, which could more than offset the value of tax deductions.
Finally, as discussed throughout SpecialNeedsNJ.com, care agreements always must be reduced to writing before care is provided or the payments likely will be considered gifts that can trigger Medicaid transfer of asset gift penalties.