Personal Service Contract: Can Medicaid Come After Unused Caregiver Agreement Funds?

If a Florida Medicaid recipient dies before their life expectancy, Medicaid generally cannot recover the unused portion of a properly drafted personal service contract from the caregiver. Once the recipient pays fair market value for future care, those funds belong to the caregiver, not the recipient, so they are not part of the estate Medicaid can reach. The keys are that the contract must be bona fide, priced at fair market value, and actually performed, and that it obligate the caregiver for the recipient's lifetime rather than a fixed term. This article explains why, and where families get into trouble.

What a Personal Service Contract Is

A personal service contract, also called a family caregiver agreement or Medicaid caregiver agreement, is a contract between a Medicaid applicant or recipient and a third party, usually a family member or close friend, for the payment of caregiving services. It is a Medicaid planning tool that works as a win-win. The recipient receives care while moving a meaningful amount of resources out of their name in a way that does not trigger the Medicaid five-year look-back gift penalty, which helps them reach or keep Medicaid eligibility. At the same time, the caregiver, often a family member who was working for free, finally receives real compensation that takes some financial stress off their shoulders. For the fundamentals, our explainer on what a Medicaid personal services contract is covers the basics.

In a Florida Medicaid-planning context, personal service contracts are often paid in one lump sum in exchange for care into the future. The amount of caregiver compensation is tied to the care recipient's life expectancy, using the Social Security based life expectancy table in Appendix A-14 of the Florida Medicaid ESS Policy Manual, the same table referenced in the assets section of the ESS manual that governs these agreements. If the contract is being used for SSI recipients, the SSA life expectancy table applies instead. The natural question follows: what happens if the Medicaid recipient passes away before their life expectancy?

Can Medicaid Recover Unused Personal Service Contract Funds Paid to the Caregiver?

The process Florida Medicaid uses to get paid back for services it covered is Medicaid Estate Recovery. It takes place after a Medicaid recipient has passed away, if they were over the age of 55. Medicaid becomes a general creditor and makes a claim against assets that pass through probate. This age-55 threshold is a federal requirement under 42 U.S.C. Section 1396p(b), and the federal Medicaid estate recovery rules confirm recovery reaches the deceased recipient's estate rather than a third party who was already paid.

Because the recipient paid their caregiver what was, at the time, fair market value for caregiving services to be rendered into the future, the funds no longer belong to the recipient. They belong to the caregiver. Remember that the recipient could have prepaid an independent third-party caregiver service for the same care. Instead they chose to pay a family member or friend, and most people would agree that family can often provide superior care to a beloved parent or grandparent compared to a stranger.

All of this assumes the contract was bona fide, priced at fair market value, and that services are actually being rendered. If you enter into a sham contract where care is not provided, all bets are off. For that reason, I always give my Medicaid clients a timesheet to hand their caregiver, whom I often meet with as well, to fill out as services are provided. Medicaid has the right to audit a family caregiver agreement to confirm it is not a sham, and if it does, the caregiver should be ready to justify the payments with proof. Timesheets provide that proof.

Can Medicaid Argue the Unused Funds Are a Gift if the Recipient Dies Too Soon?

Clients often raise some version of this scenario:

• Suppose Mom would benefit from Medicaid long-term care. She has an extra $100,000 in her bank account preventing her from qualifying under the Medicaid asset test.
• Assume that, given Mom's age and the hours of care she needs, $100,000 is reasonable compensation to pay a caregiver.
• Assume Mom is 75 years old, which gives her a life expectancy of about 12.5 years under the current Appendix A-14 table.

So you hire an experienced elder law attorney to draft a proper personal service contract, since the daughter is already providing significant caregiving. After the agreement is signed, Mom transfers $100,000 to her daughter as payment. The daughter dutifully tracks her time caring for her mother, driving her to the doctor and to exercise classes, picking up prescriptions, cooking, cleaning, and taking her to the theater. She does this for three years until, sadly and suddenly, Mom passes away.

Can Medicaid ask the daughter to return a portion of the funds because Mom died three years in, far short of the 12.5-year life expectancy she had when she signed the agreement? In other words, why does Medicaid not argue: daughter, you did not provide a large share of the care Mom prepaid for, so hand it over?

Medicaid Estate Recovery Against a Caregiver

First, in my experience I have never seen Medicaid make this argument, and I have never heard of it from my Florida elder law colleagues either.

Second, if Medicaid did try, I believe there would be litigation and Medicaid would likely lose. The personal service contract I draft provides that the caregiver renders the services outlined in the agreement for the rest of the recipient's life, not merely for their life expectancy. That means if the recipient outlives their life expectancy, the caregiver must keep providing services to the best of their ability.

In short, if the care recipient passes away sooner than expected, the caregiver got the better end of the deal. But it is just as likely the recipient gets the better deal if they exceed their life expectancy. Contracts do not have to turn out evenly, as long as both parties understood and agreed to the bargain they entered.

Finally, in practice Medicaid does not look deeply into this. If the family caregiver agreement passes the initial review by Department of Children and Families attorneys, which is why you want an experienced elder law attorney drafting it rather than trying a do-it-yourself version, and DCF is satisfied the caregiver is tracking hours that roughly match the contract, that is usually the last time the issue comes up. After the recipient passes away, if there is no probate estate, estate recovery usually ends there. For a closer look at what happens to personal service contract money after the recipient dies, we cover that question separately, and the income tax treatment of caregiver agreements is worth reading before any money changes hands.

Key Takeaways

• A properly drafted personal service contract transfers funds to the caregiver at fair market value, so they leave the recipient's estate and are generally beyond Medicaid estate recovery.
• Medicaid estate recovery applies after death for recipients over 55 and reaches probate assets, not money already paid to a caregiver under a bona fide contract.
• The contract should obligate the caregiver for the recipient's lifetime, not just their life expectancy, which is what defeats the gift argument if the recipient dies early.
• The agreement must be genuine, priced at fair market value, and documented with timesheets. Sham contracts lose this protection.
• This is not a do-it-yourself project. DCF reviews these agreements, so an experienced elder law attorney should draft it.

Frequently Asked Questions

Q. If the Medicaid recipient dies early, can Medicaid take back the unused caregiver funds?

A. Generally no. Once the recipient pays fair market value for future care under a bona fide contract, the money belongs to the caregiver and is no longer part of the recipient's estate. Medicaid estate recovery reaches probate assets of the deceased, not funds already transferred to a caregiver.

Q. What is Medicaid estate recovery, and who does it apply to?

A. It is the process a state uses to recover long-term care costs after a recipient dies. Under 42 U.S.C. Section 1396p(b), states must seek recovery from the estates of recipients who were 55 or older when they received long-term care benefits. In Florida, recovery is made against assets that pass through probate.

Q. Why does the contract cover the recipient's lifetime instead of their life expectancy?

A. Because it removes the argument that unused funds are a gift. If the caregiver is obligated for the recipient's entire life, the caregiver bears the risk of the recipient living longer than expected, and the recipient bears the risk of dying sooner. Both sides accepted that bargain, so the payment stands.

Q. What makes a personal service contract bona fide?

A. It must be a genuine agreement, priced at fair market value for the services, with the care actually provided and documented. Timesheets showing the hours worked are strong evidence. A contract where no services are rendered is a sham and loses its protection.

Q. Can I set up a caregiver agreement myself?

A. It is not advisable. Department of Children and Families attorneys review these agreements during the Medicaid application, and small drafting errors can cause a denial or a transfer penalty. An experienced Florida elder law attorney should prepare the contract.

Talk to a Florida Medicaid Planning Attorney

Personal service contracts and family caregiver agreements are valuable Medicaid planning tools, but they should never be abused or attempted without guidance. If you are caring for a parent or spouse and want to know whether a caregiver agreement fits your situation, gather a list of the care being provided and a rough sense of the hours involved, then schedule a consultation with our Florida elder law team. Our Florida Medicaid planning attorneys can draft an agreement that compensates a family caregiver fairly while protecting Medicaid eligibility, so your family keeps more of what it has saved.