Family Caregivers: Is a Personal Services Contract Right for You?

How the contract works

A personal services contract can be used for a child taking care of an aging or ill parent, but it also can be used by other family members — grandparents, grandchildren, siblings, aunts, uncles, cousins and even nonfamily caregivers. Spouses are subject to different requirements and have marriage-contingent ways to lower Medicaid “countable assets” when making their plans.

Under the contract, the caregiver becomes obligated to provide care while the care recipient is alive. “Care” doesn’t just mean medical tasks — it includes all the big and little jobs a caregiver handles, like cooking, shopping and housecleaning. Even if the care recipient lives in a facility, most caregivers still provide care, such as paying bills, organizing doctor visits, transportation to appointments, shopping for supplies and other duties.

In exchange for these services, the care recipient promises to pay the caregiver. The money may be made in periodic or installment payments or in a bulk/lump sum payment. The contract can also act as an IOU for future payments. How the payments can be made will depend on what your state’s laws allow. Do not attempt to make retroactive payments — the contract cannot cover services the caregiver provided in the past.

If you think a personal services contract may work for you, consider the following:

• This is not a do-it-yourself project. There are too many possible drawbacks if you don’t follow the rules, and even a small mistake could compromise both parties’ finances and the care recipient’s future medical coverage.

• There are rules. The terms and execution of the contract need to pass muster with your state’s laws and Medicaid requirements. If you the care recipient qualifies for other benefits, such as VA benefits, coordinate preparation of the contract to comply with both VA and Medicaid’s requirements.

• Timing is important. Determining the amount of payment going forward needs to be based on actuarial tables (these are life expectancy numbers the agencies use to determine how long a person may be expected to live, based on their current age). The payment you calculate for a caregiver of someone in their 90s is going to be very different than for the caregiver of a 60-year-old.

• The amount paid must be market rate and reasonable. Personal services contract payments to caregivers, including the pay rate for work performed, will be reviewed by Medicaid, which requires that all transactions be of fair market value.

• The document will get an official review. The written contract must be signed and may need to be notarized to be considered valid. Medicaid will review the contract and related documents, so ensure that it does not have any errors in its preparation or execution.

• Accurate records are important. The caregiver will need to start keeping records once the contract is in effect but should start as soon as possible to keep a daily log or time sheet to document time spent on caregiving duties and work performed.

Who should be involved

Before creating a contract, you will want to assemble a team of professionals.

First, consult an elder law attorney or Medicaid specialist to analyze your circumstances to see if a contract is an option. The care recipient and caregiver should be prepared to discuss their background and circumstances. The income from the contract may affect the caregiver’s legal obligations, such as child support, or their benefits, such as disability or Medicaid.

A tax professional should be brought into the conversation. Payments made to the caregiver are going to be considered taxable compensation and affect the caregiver’s Social Security and taxes. A lump-sum payment with resulting tax consequences could be especially detrimental to the caregiver’s financial security.

Family members who have an expectation of an inheritance or who aren’t involved in day-to-day caregiving may need a heads-up that the caregiver is going to be paid. At a minimum, care recipients should make sure that their estate plan (will, trust and power of attorney, particularly) aligns with the contract and that there is no conflicting information in these documents. It is important to make clear which assets will be used to pay the caregiver too. This will help quash any possible hurt feelings, confusion or fighting among relatives when the care recipient dies.

When implemented correctly, a personal services contract can be a huge help for caregivers and their loved ones. It allows the care recipient to receive assistance from a trusted person and advocate and qualify for benefits to help pay for long-term care without needing to fall into poverty. And for caregivers, who so often go uncompensated and unrecognized as a part of the health care industry, it puts money in their pocket for this necessary and important work.