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

This employee-employer agreement can help some family caregivers get compensated for taking care of a loved one or friend

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The financial burden of caregiving can be extraordinary. According to an AARP survey, family caregivers typically spend more than $7,000 in out-of-pocket-costs per year — and an average of 26 percent of their income on caregiving activities.  This does not even include how caregiving can affect a caregiver’s income through lost time at work, reduction of hours, unpaid leave, or losing or leaving a job to take care of a loved one.   

One of the most common questions family caregivers ask is: “Can I be paid for taking care of my loved one?” Yes, it is possible to receive payment as a family caregiver to alleviate the financial strain when facing extended caregiving. One option that may work is to set up a personal services contract.

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The financial burden of caregiving

I wish I had known about personal services contracts when I was caring for my mom through her battle with cancer. About five months into her diagnosis, she could not walk and could not care for herself at all. I was burned out. Even with some in-home help, her medical needs were becoming too much for me to handle — and she couldn’t be left alone for any period of time. Mom made the decision to investigate a move to a skilled nursing facility, with the goal of eventually walking and returning home.

We paid out of pocket for her nursing home, and it was far more expensive than what was financially comfortable. At the time I was also on unpaid family medical leave and not bringing in the income that my husband and I needed to support ourselves. To top it off, my workplace had made it clear that I would lose my job as soon as my leave expired. A personal services contract would have been a way to use some of my mother’s money to compensate me for caregiving, while also bringing her assets to a level that would qualify her for Medicaid to pay for the nursing home. It would have been a financial and emotional relief for us both.

Medicaid is a government program that covers low- or no-cost care for people who are financially eligible and medically needy — and many people are. Medicaid pays for $1 of every $6 spent on health care in America, and most people who need extended care consider applying for Medicaid at some point. To be financially eligible, the person who needs care can have only minimal income and assets.

A written agreement

A personal services contract (also called a lifetime care contract or family caregiving agreement) is a written employer-employee agreement between care recipient and caregiver. It’s a tool that can help a person qualify for Medicaid while also protecting assets.

The contract has some restrictions and must be done correctly to work. If you start giving away money or paying your caregiver without a contract, you may not qualify for Medicaid when the time comes. Remember that Medicaid has a five-year “lookback” period. Any money you give to your caregiver (or anyone else) before you have a written contract in place can violate the lookback rule. You don’t want to make moves that force the care recipient to pay privately for long-term care or require the caregiver to give back money.

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.

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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.

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• 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.   

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