Also known as a Family Caregiver Agreement, a Personal Services Contract is a popular Medicaid planning strategy.
The Florida Supreme Court noted that Florida nursing-home law only requires nursing homes to provide slightly over two hours of actual care per resident per day – which means nursing home residents may spend most of the day without personal hands on care. Enter the personal services contract. Essentially, a personal services agreement is a contract between the Medicaid applicant and a designated caregiver for services that are not provided by the skilled nursing home or assisted living facility (e.g. attending care plan meetings at nursing home, dealing with lawyers, attending appointments with doctors, being an advocate, driving the elder to appointments or even to events for entertainment, and more...). The caregiver is usually a family member, such as an adult child, but it can really be anyone (someone with or without formal care-giving training or experience).
The payment for services under a personal service contract is based on the resident’s life expectancy and is made to the caregiver in a lump sum payment up front.
Why Use a Personal Services Contract?
If the Medicaid applicant were to just give $50,000 to their adult child, Medicaid would treat that transfer as a gift – and would impose a penalty (which could cost the applicant tens of thousands of dollars). However, transferring $50,000 (if that amount is, as further described below, calculated to be of fair value) as payment for care-giving services to be rendered pursuant to the terms of a personal-services contract, then Medicaid would not treat that transfer as a gift.
The personal-services contract then becomes a useful tool to help the Medicaid applicant legally spend-down their assets in order to help qualify for Medicaid in way that would not impose a penalty. Courts have ruled that a properly-drafted and fair personal-services contract is not a gift and completely appropriate.
Even though we expect our children to help us for free and out of love; the fact of the matter is that being a care provider can be time consuming and difficult - almost a part-time job. There is no legal requirement that anyone (family member or not) provide these services for free. In fact, this very issue was challenged, and ruled upon (in favor of using the family caregiver agreement) by the 4th District Court of Appeal in Thomas v. Dept of Children, 707 So 2d 954 (Fla. 4th DCA 1998).
What is a Fair Rate to Pay on a Personal Services Contract?
Here is the formula: Fair Market Value on a Personal Services Contract = hourly rate x estimated hours per week x 52 x life expectancy. But what is a fair hourly rate (Medicaid will not accept an unreasonable amount)?
A professional geriatric care manager (who can be employed as part of a Medicaid qualification strategy, if there is no trusted family member or friend willing, able or available to assist) would charge between $75.00 to $130.00 per hour. So for a non-professional family member such as an adult child (who is not a nurse, geriatric care manager, social worker, medical professional, etc…) we would use a highly discounted rate. Caregiver should keep time sheets to justify money received.
Life expectancy is calculated using the Medicaid’s life expectancy actuarial tables. The earlier a personal-services contract is signed, the better for Medicaid-planning purposes.
Why Sign a Personal Services Contract Before Medicaid is Needed?
Life expectancy creates the major financial limitation when utilizing a personal-services contract as part of a Medicaid-planning or Medicaid-qualification strategy. The older someone is, the lower their life expectancy. The lower their life expectancy, the less money can be transferred to the care giver. The less money that can be transferred, penalty-free, to a caregiver, the more we need to rely upon other Medicaid strategies that may not allow for as much money to stay in the family.
There is no need to enter into a personal services contract only when an elder is immediately sick and facing huge long-term care costs (although we elder law attorneys often have to work on this basis). Signing a personal services contract as part of pre-planning (instead of crisis planning), allows the pre-planner to lock in that higher life-expectancy rate. This allows more assets to be transferred out of the Medicaid applicant’s name when the time comes to qualify and apply for Medicaid). The personal services contract is drafted to be payable on demand, so no actual money needs to change hands immediately. Money can be transferred to the service provider the day before the elder applies for Medicaid!
Benefits of a Medicaid Personal Services Contract
- Assists in getting assets out of applicant’s name, without penalty, to help qualify for Medicaid to pay for assisted living or nursing home care.
- A form of estate planning: Ideally, a personal services contract involves giving money to someone who would have inherited as a beneficiary under a Last Will or Revocable Trust anyway.
- We want to keep the money in the family instead of it going to the nursing home or government. This benefits the Medicaid recipient because now, their adult child (or other caregiver) has plenty of money to provide for the Medicaid recipient's other care needs.
- While preferable, the caregiver does not necessarily need to live locally. There are books written about long-distance care giving.
Personal Service Contract Restrictions and Risks.
The personal services contract is “executory” so the caregiving services are to be provided “as needed” to be called in at a later date. The services provided must not duplicate services already being provided by the assisted living facility or nursing home. Also the personal services agreement must be prospective, not retroactive (a caregiver cannot be paid for services previously provided or performed). Also once the contract amount is “called in” by the caregiver, it cannot be refunded or returned (or Medicaid would count it as a resource available to the applicant).
- Because personal service contracts are non-refundable, the most worrisome major risk of transferring money to a caregiver, in one lump sum, is losing control of the asset: what if the caregiver takes the money and moves to Fiji? This is why it is important to enter into a personal services caregiving agreement only with someone you trust. We can plan around this risk (if a concern) by providing money to an escrow agent who distributes the money per a set schedule.
- A personal-services contract may create inconsistencies with an existing estate plan. For example: if three children were supposed to inherit money equally, but now one child (the designated caregiver under the personal services caregiver contract) gets a lump sum in advance. This could be perceived as unfair to the other two children.
- Finally, the IRS will treat this transfer of money as a taxable event (i.e. it is income to the caregiver). We are not tax professionals and will always advise our clients and their care provider (under a personal-services contract) to seek the advice of a qualified tax professional. For more on personal service contracts and income taxes - and ways to diffuse the tax burden on the caregiver, click the link above.