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Some 44.4 million adult caregivers (21% of the U.S. population) provide at least some unpaid care to seniors or adults with disabilities according to the National Alliance for Caregiving of the AARP. At some stage, most elders who remain at home, require some assistance. More often than not, children (typically daughters and daughter-in-laws) assume responsibility for meeting their needs. The care they provide may range from activities that don't require the relative to sacrifice regular employment (for example, supervising and monitoring the care of professional care-givers) to actually providing five or more hours a day, or, even, to moving into the elder's home and providing 24/7 care. “Caregiver Contracts” allow such children to be remunerated as employees. A formal agreement, set up by a lawyer, between the elder and caregiver, (not necessarily a child, but, possibly, a relative or even a friend), should specify the care-giver's duties as well as the responsibilities of the elder in his/her role as employer. All compensation should be based on realistic hourly wages for services comparable to that of local home care companies.
A small but growing number of families are taking advantage of the Caregiver Contract option and “hiring” adult children to provide compensated at-home-care for the purpose of reducing the size of a parent's estate and thereby accelerate eligibility for long-term-care coverage under Medicaid. For other families, care-giving contracts simply provide a means of recognizing and rewarding the significant amounts of time, effort, and money that family members often spend in their care of an elderly relative.
Such contracts are promoted for three principal reasons. First, they can minimize misunderstandings and feuds among relatives as to who bears what responsibilities and how such services are to be compensated. Second, in an increasing number of cases, Long Term Care Insurance will provide for such services, even if performed by children, but only if there is a formal, reasonable contract. Third, compensation are increasingly challenged by Medicaid authorities as unwarranted “gifts” which delay eligibility. A carefully worded and reasonable Care Giving Contract can avoid embarrassing and costly delays in obtaining public benefits.
Hourly compensation is preferred. Compensation for care received can vary between lump-sum transfers of cash or transfer of a home under a carefully prepared Deed supported by a Contract to much more biweekly payments based on the actual hours that the care-giver has worked. To stand up to scrutiny from many sources (jealous relatives, the IRS, and Medicaid), the rate of compensation should be reasonable on a per hour basis. Most such contracts reflect hourly earnings by unskilled and semiskilled employees, ranging from $15 to $25/hour depending upon one's locale. The argument against compensating one at a higher rate – say the hourly rate the care-giver might earn as a professional (accountant or lawyer, for example) is that, in such cases it would make more economic sense to hire a home health aide at her regular rate of pay.
Lump sum payments present greater risks. While commonly employed in other states, the “lump sum” method of payment for care is seldom used in Massachusetts because it would attract intense scrutiny should an application for Medicaid become necessary. The danger is that without carefully documented care records, such a transfer of assets would be regarded as a gift, or to use Medicaid's dreaded phrase, a “transfer for less than fair market value,” triggering a lengthy disqualification period for Medicaid. Most experts believe, however, that, if set up properly, caregiver contracts for which compensation is paid as either a lump sum or an interest in real estate are not gifts if the patient receives a real service in return. In addition to being based on a reasonable hourly compensation, a lump sum agreement must reasonably be based on how long the services will be needed and be performed. Since Medicaid now requires that promissory notes and annuities be “actuarially sound,” it is highly likely that, in the future, it is likely that those wishing to uphold the legality of a lump sum agreement will have to show that they reasonably intended to provide services for as long as the compensation warranted.
Why? The care-giving contract should follow certain formalities, i.e. rates should not be inflated for the purpose of shifting large amounts of money out of an estate. All methods of compensation for care received should be carefully documented in precise employment records, as checks over $1,000 are carefully scrutinized by Medicaid officials.
What should it include? An appropriate care-giving contract should include the following: • detailed list of duties of the caretaker
• time when each duty is to be performed
• hours of work and corresponding weekly schedule
• rate of compensation for care
• exemption of the caretaker from liability for medical condition of the elder
• reimbursement for any care-related expenses incurred by caretaker
• description of employment benefits provided to caretaker
• arrangements for substituted care when the principal care-giver is not available or healthy and for respite care to allow the care-giver to take vacations.(A number of assisted living facilities will arrange for stays as short as 14 days to accommodate safely elders whose care-givers are on vacation.
• conditions under which agreement could be terminated
• termination of the contract upon death or hospitalization, possibly with a brief adjustment period for the care-giver to return to work
Who should sign it? The elder should sign the contract. If he or she is not competent, a legally appointed surrogate (the Agent appointed under a durable power of attorney or a court-appointed fiduciary (temporary or permanent Guardians or Conservators) should sign for the elder. If the signer is also the person named as “care-giver” it is desirable that someone else sign on behalf of the elder. To avoid potential objections, it is usually wise to provide for witnessing or notarization of the agreement.
The IRS has ruled that income paid to a care-giver, even if the care-giver is a member of the elder's family, is taxable income. In addition, if the compensation exceeds $1,400 a year, the elder or his/her agent is responsible for withholding and even contributing to federal and state employment-related benefits.
What record keeping is required? Some important responsibilities of the employer, regardless of whether the homecare worker is a child or agency professional:
• providing a Form 1099 at the conclusion of each tax year to the caregiver as well as to the IRS
• reporting annual payments of $1,400 or more in cash wages. Social Security taxes and Medicare taxes must be withheld, as well as the employer's share of FICA taxes
• applying for an employer ID number for use when completing all required IRS forms.
• including all wages & withholdings in annual personal federal Form 1040 income tax return
• electing whether or not to withhold federal and state income taxes for “domestic services in a private home.” If taxes are withheld, a signed statement must be procured from each worker stating that the employee understands this arrangement.
• completing a Form M-4 if MA taxes are to be withheld
• registering with the Division of Unemployment Assistance (DUA) through the completion and filing of an Employer Status Report
• assuming legal liability for the hiring of any employee not a US citizen
• maintaining employment records for at least 4 years after a return is due or paid
Can you reduce record keeping and expenses by considering the care-taker an “independent contractor”? Since an “independent contractor” is a vendor rather than an employee, the only tax the elder is only responsible for annually filing is a 1099. The independent contractor is responsible for withholding income and contributing to other governmental programs. While there are no statutory distinctions between that of an “independent contractor” versus an “employee,” the IRS relies on 20 factors based on common law that help distinguish the two statuses. Based on these factors, home-care workers are almost always considered employees rather than independent contractors, because the person who hires them sets the hours and responsibilities; determines the particulars of the job; and otherwise directs, or has the power to direct, the activities of the care provider. Therefore, consumers of home care services, are subject to the same tax responsibilities that govern other employers.