How to Protect Assets From Nursing Home Costs.

When it is too late to transfer assets and/or purchase nursing home insurance the best way to protect assets from nursing home costs may be a caregiver's agreement, also known as a personal care agreement, or personal services agreement.

Paying family members for personal care is a valid Medicaid planning tool only when it is properly done. Payments can be for things like fixing-up the elderly person's home to sell it, maintaining their property, paying their bills, taking them to the doctors, and even, recording the caregiver's payroll. Also, caregivers should be reimbursed for mileage and other out-of-pocket expenses.

The big disadvantage of paying family caregivers is that the payments are taxable to them. For that reason this is a planning technique used only when it appears that an extended stay in a nursing home is inevitable and most or all of the accumulated wealth of the senior is going to be consumed paying the nursing home. Also, this is a great way to hedge your bets.

Paying a high school or college age grandchild to care for an elderly grandparent can be very rewarding because the grandchild may be in a zero or very low tax bracket.

Since Medicaid usually invalidates any transfers made 5 years prior to a person applying for benefits, there always is a risk that recipients will have to surrender any assets transferred during that period. Don't transfer everything! Save some funds so that they can be used to pay family members who act as caregivers; this is one way to insure that family members will receive something even if the admission to the nursing home comes way before the 5 year period has expired. In essence this is a hedged bet; if the family member has to go into a nursing home before the 5 years are up, the funds that were saved can transfer to the family via the caregiver's agreement. At least the family will get something even if the elderly person goes into a nursing home immediately after setting up the caregiver arrangement. If the elderly never goes into a nursing home, the family can inherit the money saved. If a nursing home is needed after the 5 year period, the caregiver's agreement can be used to transfer the cash saved. The cost of hedging the bet is that the amount received is taxable, while gifts and inheritances are not subject to income tax.

Medicaid allows this only if the payments are at an arm's-length. This means that the payments have to be reasonable and well documented. This has to be like any business arrangement. Payroll taxes must be properly recorded. The arrangement should be documented in writing. You should consider having your attorney draw up an agreement. Payments should be done regularly as spelled out in the contract. A large payment covering an extended period of time may be problematic. It is important that it does not look like the family took the money first and then decided to call it a payment for services as an afterthought.

If the payments to the caregiver are not properly documented and reported, Medicaid may consider them to be improper and require that they be returned. Please refer to the appendix which has the payroll tax summary for a household employer in New York. An accountant in your state can help with payroll taxes.

Some advisors seem to suggest that Form 1099 (miscellaneous income) can be used instead of filing all the payroll tax returns. I do not recommend that because a Medicaid auditor may question if that was just an afterthought, and technically, the caregiver is an employee. Caregivers can be considered household employees. I do not recommend calling them independent contractors unless they are really in the business of care giving.

Often, the elderly patient dies shortly after the caregiver arrangement is put in place. For that reasons it is very important that the early steps in setting up a payroll were followed. The Federal ID number should have been requested and the employer should have registered with unemployment insurance. This can prove that the arrangement is not just an afterthought.

The rates of pay have to be reasonable. Check the rates charged by professional caregivers in your area so that you can document that the rates used are reasonable. You may want to change different rates for difference services. A reasonable rate for mowing the lawn may be less than the rate changed for managing financial affairs. This may be the only way to protect assets from nursing home costs.

Question:
I am 65 years old and in good health. I own a home and have about $300,000 in savings. I have one daughter and she helps me with things like housekeeping and shopping. She has a good job. Do I need a caregivers agreement at this time? Should I pay her for services now in order to transfer money to her before I become incapacitated?

Answer:
No. Let me make the following points:

• If you are in good health you can buy long-term care insurance. This will insure that your daughter will inherit your home and savings even if there is a long-term stay in a nursing home at some point.
• It is best to avoid making taxable payments to someone with a good job because they will be taxes on the funds. Caregiver payments are best when the recipient is either in a very low tax bracket or when it appears to be inevitable that the funds will be going to pay nursing home expenses. Keep in mind that gifts and inheritances are not taxable.
• Long-term care insurance is less expensive than paying income tax on funds transferred.
  There are other things that you should consider like gifting your home to your daughter and keeping a life estate in it. You need to meet with your attorney to discuss other planning alternatives. Maybe he will recommend a trust.

Question:

My father is 90 Years old. He just went into a nursing home and has about $60,000 in saving and owns a home worth about $100,000. We are going to sell the home; it would bring a higher price if several repairs were made to it, but, why should my sister and I work hard getting the house ready if the money is just going to go for nursing home bills? Can we transfer his home and savings to my sister and me? What can we do?

Answer:

It looks like your father's estate will be consumed by nursing home bills. While you may not receive any inheritance, you are entitled to reasonable compensation for the services you render.

In a short time your father will have to apply to Medicaid. You cannot transfer the home or other assets.

You should enter into a personal services agreement with your father. You and your sister are entitled to be compensated for the services you perform in preparing the house for the market as well as any other services you perform. You will have to meet all the legal requirement for payroll. You need a good lawyer and accountant who are familiar with the requirements. Document the work you do and the time you spend. Before and after pictures of the work you do on the house may be helpful.

Notice I called this a personal services agreement not a caregiver's agreement. The reason I did that was because I wanted to point out that the services do not just have to be those normally given by caregivers. Maintenance work, gardening, and other services can apply.

This may be the only way to protect assets from nursing home costs.

Question:

My health is starting to fail me. My children help me but I may have to go into a nursing home in the next few years. I cannot buy long-term care insurance because of my poor health. I have gifted my home to my children and keep life use. I have sufficient pension to live on as long as I am not in a nursing home. My children suggested that I gift my remaining funds to them ($100,000); they would save the money in case I have to apply for Medicaid within 5 years so that it could be returned if necessary. What do you think of their idea?

Answer:

Since anything transferred may have to be returned if you need a nursing home during the next few years, you may want to hedge you bet with a caregiver's agreement. For example, if you gifted $50,000 and paid $50,000 in the form of services to your children over the next few years, your children would be sure to receive at least about $35,000 ($50,000 less $15,000 for taxes). If you gifted the $100,000, they may receive nothing if you find you are in a nursing home during the next few years. Long-term insurance is a more cost effective way to protect assets than paying income taxes on caregiver's wages. If insurance is not available, caregiver's agreements may be the best option.

You should review this with your lawyer. Maybe a trust a good idea.

Below is a summary of some of the payroll tax issues involved with a having a caregiver payroll. This may seem a bit overwhelming, a good accountant can help.

Employer Identification Number- An employer identification number is needed to file the various payroll tax forms.

W-4 Form- It is necessary to have each employee fill out a W-4 form, Employee's Withholding Allowance Certificate.

New Hire Reporting Requirements- New York State requires all employers to report new hires within 20 days of the hiring date. A copy of the properly completed W-4 can be used to meet this requirement.

New York State Unemployment Insurance- It is necessary to apply for a registration number with the New York State Unemployment Insurance Division.

Every quarter a Form NYS-45 has to be filed. This is a very easy form to fill out.

Federal Withholding, FICA, Medicare - Most employers have to file a 941 forms every quarter, but, most caregivers are considered household employees and the IRS has a Schedule H which is attached to the employer's individual income tax (form 1040) due April 15 to facilitate these filings for household employees.

In 2011 household employees are allowed to receive up to $1,700 without being subject to FICA and Medicaid. If they received more than $1,700 all wages were subject to FICA and Medicaid.

Please note while the Federal Government has an exception to reporting requirements (use the Schedule H once a year), NYS Unemployment Insurance does not. Thus any amounts paid have to be reported on the NYS-45.

Federal Unemployment- There is a Federal Unemployment Insurance tax; for most employers this is paid though out the year as income is paid and a Form 940 is filed once a year. For household employees, the Schedule H, discussed above, meets that requirement.

New York Workers' Compensation- Normally, employers in New York State are required to maintain a Workers' Compensation Policy on their employees, however, under certain conditions domestic workers are exempt. This requirement should be reviewed to make sure that the employee meets the requirements. Generally the work has to be in a private household and the employee cannot work 40 hours or more per week. Employees cannot live on the premises or a workers' compensation policy will be required even it they work less than 40 hours per week.

The workers' compensation board gleans information from other agencies and there is a high probability that an employer will be challenged if they do not have workers' compensation. The penalties can be several thousand dollars, so, it is important that the accountant or attorney review this area.

I recommend to clients that the caregiver's contract state the employee cannot work more that 39 hours in any week.

New York Disability- Employer's of household employees were exempt from the requirement to carry disability insurance on employees who worked less than 40 per week, however, on August 31, 2010 Governor Patterson signed a bill changing that. It is now necessary to have disability insurance in place, however, there is an exception for household employees who are related to the employer, so usually it is not necessary.

Forms W-2 and W-3- The employee must be given a W-2 form in January each year; a copy is also mailed to the Social Security Administration along with a W-3, which is the transmittal form.

Payroll Records- Since the payroll records most likely will be reviewed by Medicaid, it is necessary to maintain good records that not only record the hours worked but also the service performed.