Most adult children feel some responsibility for taking care of their aging parents if they develop physical or mental deficits. Families often think that providing unpaid care comes with being a daughter or son and that this care is provided out of love and affection with no money expected.
This may be true when it's only a few hours here and there to pay bills, run errands, or do some household chores. However, the role of caregiver can last for many years, and caregiving demands cause some family caregivers to change or leave their jobs while others must become live-in caregivers. They give up a lot of their time and freedom. In these situations, pay or some other form of financial restitution seems fair.
Your loved one offering to pay you in cash or even extending an invitation to move in together can cause blow-ups with your siblings or other family members and impact family dynamics going forward. Furthermore, Medicaid may regard these payments as gifts, which can delay your loved one securing Medicaid or getting nursing home coverage if they need it. Therefore, as difficult as it may seem, you should enter into a financial agreement for personal care.
What it is
A personal care agreement (PCA) is a signed and dated, legally binding contract listing a salary and duties. Therefore, the agreement starts with a job description outlining the specific tasks you need to perform.
Understand that you are engaging in an employment arrangement: your loved one is the employer and you are the employee.
Usually, these agreements are part of estate planning or part of estate and Medicaid planning. Proactive planning can help families stay calm, focused, in control, and avoid costly penalty periods of ineligibility for Medicaid or other state funding.
Parent-child care agreements are the most common, but agreements can be made with other family members, friends, or private caregivers.
Aging Care offers a simple personal care agreement template.
Key elements of a personal care agreement
According to the American Bar Association and the American Council on Aging, these are the essential elements of a PCA (that will also help your loved one avoid problems with Medicaid):
Include a start date for services and how long the agreement will be in effect (remember the contract can be renewed if needed). Only services provided on and after the start date are valid for compensation.
Detailed descriptions of the services to be provided, where each will be provided, and how often.
How much and when (weekly, biweekly, monthly) the caregiver will be paid.
Consider caretaker leave needs (illnesses, emergencies, vacations, respite care, or other time away from caregiving).
Review and update the care plan based on changes in condition (and amend the PCA accordingly if duties change).
A statement that the terms of the agreement can be modified only by mutual agreement of the parties in writing, and a termination clause.
Attach any legal and financial plans, if/when available (this includes Powers of Attorney, wills, trusts, and health care directives, as well as the assets and resources in the estate).
Keep a daily log or note archive.*
*It is extremely important for you to keep an accurate log of the services you provide and when, as well as a ledger of payments received. This documentation is especially important if your loved one ever needs to file for Medicaid. It proves that they have given this money in exchange for necessary care services and not gifted it away to obtain financial eligibility for long-term care covered by Medicaid (which is misrepresentation and fraud).
Payment options
Most PCAs are paid on a weekly, biweekly, monthly, or other pay-as-you-go basis. However, some states permit lump sum payments to cover future care for the remainder of your loved one's lifetime. Because this can involve a large amount of money, it must be done carefully to avoid backfiring as a gift. For this reason, it may be wise to consult a reputable elder law attorney or legal professional with Medicaid planning expertise.
No retroactive payment option
If you have already spent time as an unpaid caregiver, regardless of how much you've done or for how long, any payment your loved one makes to you for services already rendered is considered a monetary gift. This is important because should your loved one need Medicaid, or is already on Medicaid and now needs nursing home care, Medicaid does not allow any gifting within the five-year look-back period from your loved one's application date.
In other words, if your loved one reimburses you for the care you provided over the past few years and then applies for Medicaid, they will face a long penalty period of ineligibility for Medicaid assistance. Unless there is an explicit written agreement that sets forth terms of family caregiver compensation (a PCA), state Medicaid programs will even consider current payments made to you to be gifts, as well.
Taxes. Yep, taxes.
Be aware that as a paid caregiver, you are regarded as your loved one's employee, earning taxable income. This may require your loved one to file paperwork and pay employer taxes, or hire a payroll company to manage the details.
Accountants and professional money managers provide bookkeeping and payroll services for the household. Consider utilizing a third party for the details of setting up tax reporting and withholding, and worker’s compensation for you. It is not recommended that you perform this service as part of your job description as the perception of financial exploitation may become an issue.
What you earn is reportable income and must be reported as income on Form 1040. You may be required to pay self-employment tax depending on the facts and circumstances. Consult with an accountant for specific laws and requirements.
Contracts and tax forms might seem excessive in light of caregiving, but you may avoid a lot of time, trouble, and headaches later by doing things the right way now.
For full details, review IRS Topic No. 756 - Employment Taxes for Household Employees.
Do we need a lawyer?
No, a lawyer is unnecessary to create a personal care agreement, though it may be advisable when entering a contractual relationship. It depends on your set of circumstances and how complex an agreement your family requires.
It is recommended that you seek the advice and guidance of a professional Medicaid Planner in some situations. Especially if your loved one foreseeably plans to apply for Medicaid in the future. If a PCA is not drafted properly, your loved one may unknowingly violate Medicaid’s Look-Back Rule and be penalized with a period of Medicaid ineligibility.
