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When A Relative or Friend Receives Compensation for Caregiving

by A.K. Lehmann, Paralegal.

More and more Americans are caring for an older friend or relative. According to the National Alliance for Caregiving and AARP, 43.5 million serve as caregivers to their elders, a 28% increase from 2004. Because of the tough economic climate of recent years – including the high unemployment rate – an increasing percentage of those are receiving compensation for providing care to a relative or friend.

This trend is predicted to rise due to the 2006 change in Medicaid law that makes it harder for people who qualify to give away assets. (A New York State Medicaid attorney familiar with the changing laws can assist in creating trusts that may make it possible to give away assets and still qualify for benefits.)

When caregivers make financial sacrifices it is often appropriate that they receive compensation.

There are various ways to pay relatives or friends with an:
• Hourly wage,
• Annual gifts or lump sum payments, or • Larger inheritance.

Families must consider estate planning implications, Medicaid eligibility rules, and tax consequences.

Under federal law, when an annual compensation exceeds $1,700., an employer and employee each owes federal payroll taxes of 6.2% for Social Security and 1.45% for Medicare. There are also state taxes. (For more information see IRS Publication 926 “Household Employer’s Tax Guide.)

Because of these reasons, elder law attorneys advocate the drafting of a written agreement called “a personal care contract” – before services are rendered.

A written agreement is especially prudent if the care recipient may eventually need to rely on Medicaid. Without an employment contract, Medicaid would consider payments to the caregiver as an attempt to hide assets – a real “no-no” for Medicaid administrators who carefully review applications.

Caregivers and recipients are urged to disclose any compensated caregiving arrangements to family members. New York elder law attorneys see family conflicts and even estate litigation as a result of hidden arrangements.

Source: Wall Street Journal, 12/10/10. “Should You Pay a Relative to Take Care of Mom?” Anne Tergesen

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