As we age, we often hire people to perform services for us, such as housekeeping, cooking, driving, bill paying and personal care. We sometimes move in with our children or our children move in with us.
But what most of us find out too late is that seniors can and should hire their children and pay them for performing services they are or will be providing anyway. Parents sign contracts with their children specifying what services will be performed and how much the children will be paid and sometimes how much the rent will be.
It’s not that children don’t love their parents and would help them anyway, but caregiver contracts have significant estate planning benefits.
These arrangements, which are called personal-care or personal-service agreements, can help to reduce the size of a parent’s estate or at least minimize the growth. This may become important if the parent later requires a nursing home.
These contracts help compensate for the considerable time, effort and money that family members all-too-often spend watching over and taking care of elderly relatives.
This arrangement can also minimize feuds among siblings and other relatives. Oftentimes, one child serves as a primary caregiver and a parent may reward him or her by making informal gifts or by doling out a bigger piece of the estate in the will. Unfortunately, that often leads to family fights or will contests.
Recent changes in the law have made it more complicated for parents to qualify for Medicaid after transferring assets to their children. But if you pay your child under a services contract, it should not disqualify you from qualifying for Medicaid.
A formal arrangement, done in advance of payments, is established. The parent agrees to pay in exchange for the services outlined. Duties can vary from preparing meals, bathing and dressing to housecleaning and chauffeuring, as well as arranging doctor’s appointments and friends’ visits and overseeing medications. Be careful, you can’t pay the caregiver an inflated rate in order to shift lots of money out of your estate.
If set up properly, the caregiver contract will not be considered a gift to a child; the parent is receiving a real service in return.
The compensation is considered ordinary income, so the caregiver has to pay income taxes on the payment. Also, depending on how the contract is structured, Social Security and other payroll taxes may have to be withheld.