A parent who becomes frail or starts to develop dementia rarely can be alone full time even if not yet ready for long term care in a facility. While an elder law attorney may arrange for Medicaid to fund some care at home, an adult child may need to care for [and possibly live with] the parent. Should that child be paid, and if so, how?
There is no one size fits all answer because both needs and services vary from family to family. Where the parent only needs light assistance, the child may be able to continue to work and socialize, but in other situations, a child may give up career and social life to take care of mom or dad. So what should families do?
It may prove fair to base parent- child financial arrangements on what the child gives up to care for mom or dad. Thus, a child who just helps with shopping and paying bills might be reimbursed for out of pocket costs or receive a small stipend. Parents who need substantial care may give the caregiver child an hourly or weekly fee or an extra share under their wills.
Sometimes payment involves funding an addition to a child’s home or the child coming to live with mom. These kinds of arrangements can alleviate many concerns and save a lot of money but they require counsel to address tax concerns and head off major issues if a parent seeks Medicaid later. For instance, in paying for an addition to a child’s home or transferring dad’s home to a child, dad makes a valuable gift that can lead to Medicaid gift penalties. In contrast, an elder law attorney may avoid Medicaid gift penalties by designing the arrangement as a caregiver child transfer or purchase of a life estate. These kind of techniques likely will elude a lay person because they involve complex rules rather than common sense.
Like so many family situations, it is best for parents to discuss the options with all of the children and come to an agreement before embarking on the new arrangement. Reaching agreement on long term care compensation is just the first step. To avoid misunderstandings, arguments, and even law suits down the road, the agreement should be put to paper in language that will hold up in court. Care arrangements can impact tax and Medicaid planning. An elder law attorney also can help families develop defenses that will stand up in court should a disgruntled child later attack a care arrangement as unfair; improper; or the product of undue influence, over reaching, or even fraud.
What about taxes? When a child is paid and provides services to a parent, the payments can constitute either income or gifts.
Payments tied directly to the services [such as hourly or weekly pay] probably are taxable income to the child and subject to payroll tax and withholding. Unfortunately, the parent doesn’t get a corresponding deduction because individuals generally can’t deduct payments for personal services. This increases the after tax cost. However, not treating payments as taxable income can prove even more costly.
I’m often asked why families shouldn’t just ignore taxes; who would even know? First and foremost, the law requires compensation to be reported as taxable income and tax evasion can lead to criminal charges and civil penalties. In addition, payments from parent to child that aren’t income must be gifts.
Medicaid authorities typically treat as gifts payments from parent to child that parent and child don’t report as taxable income. As discussed throughout www.SpecialNeedsNJ.com, most gifts made within the Medicaid look-back period trigger a penalty period, which depends on the amount given. The look-back period goes forward starting sixty months before applying for Medicaid. However, because the penalty doesn’t start until the donor applies for Medicaid and satisfies Medicaid income cap and resource cap, an application that isn’t timed correctly can delay the start of a penalty for years longer than necessary. Therefore, whenever gifts may occur it is essential to consult an elder law attorney before applying for Medicaid. This brings us back to the question why pay taxes on compensation from parent to child?
As unpleasant as taxes may be, it can be far cheaper for a child to pay tax on a parent’s compensation than for mom to incur Medicaid gift penalties. If the child doesn’t work beyond caring for mom, the tax rate probably will be modest. In addition, the child may be able to deduct expenditures to provide care, and possibly even take a home depreciation deduction. However, it is best to get legal advice on what may and may not be deductible.
Even if the family treats payments from parent to child as taxable income, Medicaid regulations may impose gift penalties unless the payments are pursuant to a legally binding written agreement. A well designed care compensation arrangement can dovetail nicely with traditional planning to qualify for Medicaid if dad eventually needs care in a nursing home or assisted living facility or home health aides. Payments per a binding care agreement should reduce resources toward Medicaid limits without triggering gift penalties. In addition, careful planning may even allow a parent to transfer a valuable home to a caregiver child but avoid Medicaid penalties.
Families should work with an elder law attorney to ensure smooth implementation of a family care agreement and take advantage of Medicaid planning opportunities. In addition to a written care agreement, a new will, trust, deed, or power of attorney may prove important to implement the agreement and allow for potential Medicaid planning. For instance, without a power of attorney that authorizes Medicaid planning, an expensive guardianship proceeding may be your only option whereas our firm often helps clients accomplish their goals with no need for guardianship.
If a family care arrangement in your future we’d be happy to help you “get it right.” Please call or email us today.