Centara Connection

Seniors ‘Hiring’ Their Children as Caregivers

Brittany Oates, Estate Planning Attorney

As people age, they often hire people to perform services for them, such as housekeeping, driving and the provision of personal care. Many seniors are now hiring their own children to perform these services. They are executing contracts with their children specifying what services will be performed and how much the children will be paid. While these children love their parents and would care for them anyway, these contracts can have significant estate planning benefits.

Estate and gift tax. If the parents gave their children the same money, the gift could be subject to estate or gift tax. However, by “paying” them under a contract, the parents can get the money out of their estate without taxes coming into play.

MediCal. Recent changes in the law have made it harder to qualify for MediCal by gifting assets to family members. Generally speaking, if you “pay” your children under a service contract, this won’t disqualify you from Medicaid.

Peace in the family. When one sibling takes primary care of the parents later in life, it can lead to family tensions. Such stress among family members can lead to hurt feelings, disputes or even estate contests. Compensating the caregiver through a contract can avoid this type of problem.

How much should a caregiver be paid? This depends on numerous factors. Start off by making a list of what the caregiver will do, then contact some local home-care agencies and see what they charge for similar services. Parents might be tempted to pay a family caregiver much more than the “market” rate, because this would enable them to get more money out of their estate. However, the government could challenge the contract, and the tax savings, and render them invalid. Some parents arrange to pay a caregiver a single lump sum up front based on their life expectancy. This can be a good way to get money out of an estate quickly. However, the parents will want to consider what would happen if the child, who has already received the lump sum, fails to provide the care that has been promised or becomes unable to do so.

There are some downsides to these contracts. For one, the money paid to the caregiver is “income,” and the child must pay income tax on it. Further, depending on the set up, the parents may have to withhold Social Security and other payroll taxes.

While some people are uncomfortable about money changing hands for the care of a family member, the child would likely be providing these services anyway. The contract is simply an estate planning vehicle to enable parents to preserve their estates and provide for their families in the future.

Centara Legal Group, APC
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