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How Personal Services Contracts and Pooled Trusts Can Work Hand-in-Hand

How Personal Services Contracts and Pooled Trusts Can Work Hand-in-Hand
Medicaid Planning
Jason Neufeld
April 22, 2020

Personal Services Contracts and Pooled Special Needs Trusts are two of the more popular and common Medicaid-planning strategies available in Florida.

Brief Overview of Personal Services Contracts and Pooled Trusts

To begin, here is a brief overview of personal services contracts and pooled trusts (click the links to be directed to additional information on each Medicaid device).

Personal Services Contract - Overview

Personal services contracts (also referred to as Medicaid family caregiver agreements) are a way for family members to get paid for services that they may have been already doing for free. By assigning a fair weekly pay, based on hours actually worked, and extrapolating out through the Florida Medicaid recipient’s (or applicant’s) life expectancy, we can legally and ethically transfer a large chunk of assets out of the Medicaid recipient’s name and put it in the hands of one or more caregivers – who may be related to the care recipient.

The caregiver usually has to pay income taxes on this new source of income and is subject to the caregiver’s creditors, divorce, being spent unwisely, etc…

Remember, the goal with all Medicaid planning is to transfer assets out of the Medicaid applicant’s name in a way that will not trigger the five year look-back period by being deemed a gift. If the Medicaid applicant were to just give assets to their children, it would disqualify the Medicaid applicant for Florida Medicaid Waiver (which pays for home-health care and a portion of ALF bills) and the Florida Medicaid Institutional Care Program (ICP) which pays for skilled nursing home care.

A properly drafted and executed personal services contract would legally and ethically allow for the transfer of assets for fair-market value and thus not be deemed a gift.

Pooled Special Needs Trusts - Overview

Pooled Special Needs Trusts (often just referred to as “pooled trusts” or d4C trusts) hold a special designation under Federal law. In Florida, any assets transferred to a proper pooled trust wont be subject a Medicaid penalty period (this is not the case with disabled SSI recipients over the age of 65).

Pooled Special Needs Trusts are managed by a non-profit organization, charge separate and ongoing annual fees (usually very reasonable), and are subject to a Medicaid estate recovery obligation if there are any funds in the account after the Medicaid-beneficiary passes away.

How Personal Services Contracts and Pooled Special Needs Trusts can work together

Oftentimes, the biggest concern with the Medicaid family care-giving agreement / services contract is: what happens if the primary caregiver passes away? Where will the money go? Who will pay someone else for the same care?

The problematic scenario is as follows:

A valid personal services contract is signed by Mother who needs care at home and Daughter – who is providing some care and overseeing additional care being paid for by the Medicaid-waiver program (daughter works, can’t be home all the time, or otherwise just needs help caring for mom).

Through the validly-executed personal services contract, mom transfers $150,000.00 to her daughter as payment in advance for services to be provided to mom for the rest of mom’s life.

What happens if the daughter dies? The personal services contract funds are daughter’s actual money. Meaning daughter’s estate planning will dictate where that money goes. Yet mom still needs care and it would be nice if the money was around to pay for someone to take daughter's place as the primary caregiver or caregiving supervisor.

The same concern applies to: what if daughter gets divorced? Presumably, ½ of the personal services contract funds go to the ex-spouse. Also, what if daughter just decides that she can’t handle the work anymore and would prefer that someone else get paid to help out mom? If all personal services contract funds are immediately paid to daughter, she has no obligation to turn that money over to anyone else.

To prepare for any of these contingencies – a pooled special needs trust can work very closely with the personal services contract.

It may be prudent to place the funds in pooled special needs trust that pays the caregiver as work is done and provides for the payment to successor or backup caregivers should the primary caregiver become unable or unwilling to continue to work!  

In effect, the process would work like this:

Step 1: Your elder law attorney creates a personal services contract with multiple potential caregivers.

Step 2: Your elder care lawyer supervises the creation of a pooled special needs trust joinder.

Step 3: All funds in need of medicaid protection are transferred to the pooled trust (or perhaps some funds are transferred to the caregiver but the majority goes to the pooled special needs trust).

Step 4: Florida Medicaid application submitted and benefits are received (e.g. medicaid helps pay medical bills, prescriptions, home health care, ALF bills, or nursing home bills).

Step 5: The primary caregiver listed in the personal services contract would submit their hours to the pooled special needs trust trustee who would pay promptly and in full.

Step 6: Should the primary caregiver become unable or unwilling to provide care giving assistance, the pooled trustee could be notified and the next caregiver listed in the medicaid family caregiving agreement would be tapped to begin providing care to the Medicaid recipient and submit their hours as discussed above.

Another benefit of building in a personal services contract inside a pooled trust

If you have read up on personal services contracts on you undoubtedly know that the personal services contract has an income-tax implication for the caregiver. They are receiving an extra source of income for the services that they are providing under the terms of the family caregiver agreement. Just because they may be related does not mean that they are treated any differently in the eyes of the IRS. When a particularly large lump sum is being transferred to a caregiver per the terms of the personal services contract, it can mean a jump into a higher tax bracket.

One way we know of to defer the payment of income taxes is to have the caregiver agreement proceeds be paid out, over time, through an annuity. We can use the same principle when we build in a personal-services contract within a pooled trust. Because the pooled special needs trust would only pay out as invoices are submitted, the caregiver need only pay income taxes on the extra income in the same year it is received.

I hope this clarifies how the personal services contract and pooled special needs trust can be utilized in conjunction with each other to ensure continuity of care for the Medicaid recipient and provide some tax-deferral benefits to the caregiver as well.

To discuss these and other Florida medicaid-planning strategies in more detail, please schedule a consultation today!

Jason Neufeld

Jason Neufeld is the Founder and Managing Partner of Elder Needs Law, a Florida estate planning and elder law firm he created in 2017. With more than 15 years of experience practicing law, he represents clients in a wide range of legal matters, including Medicaid planning, estate planning, elder law, probate, Medicare, and life insurance.

Jason received his Juris Doctor from the University of Miami — School of Law and is a member of the Florida Bar and the Broward County Bar Association. He has received numerous accolades for his work, including being named a Rising Star and Super Lawyer by Super Lawyers and among the Florida Legal Elite by Florida Trend in 2024.

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