Millions of Americans are currently caring for an elderly family member or friend at home without receiving any compensation. Depending on the circumstances, it may actually be beneficial for both parties to enter into a care contract wherein the caregiver accepts payment for the care they are providing for their loved one and also formally assumes responsibility for that care.

For example, if the loved one being cared for reaches a point where nursing home placement becomes necessary, all of his/her money will be considered available to pay for nursing home care and he/she will not be eligible for Medicaid benefits until all of the assets have been spent down to $2,000. Certainly the care provided, while the loved one remained in the community, is just as valuable to them and worthy of payment as the care provided by the nursing home. With a care contract in place, the caregiver can be paid, (at prevailing market rates) and every dollar spent will count towards the “Medicaid spend down” should the loved one ever apply for Medicaid benefits.

Having a care contract in place also ensure Medicaid will not impose penalties on the money received by the caregiver. Without a contract in place, Medicaid will assume all care services are provided for free. Any payments made to a caregiver will be considered a “gift” or a “transferred asset” and will impose penalties resulting in ineligibility for Medicaid benefits.

From a caregiver perspective, although they often provide these services for free, it can be difficult for them when, at the time of their loved one’s death, the caregiver that has provided several years of care receives the same inheritance as the other heirs, many of whom have not been involved in the caring for the loved one.

On the other hand, if a caregiver is receiving payment and there is no contract in place which defines the care they have been working hard at providing, other heirs may be upset by the additional monies that caregiver receives.

Also, if a child has been caring for a parent for at least two years, there is another Medicaid planning technique that may be available which would allow that parent to transfer their home without incurring any Medicaid transfer penalties. This exception is know as the “Child Caretaker Exemption” and it provides that it is not disinvestment to transfer a home to a child over the age of 21 who has lived in the parent’s house for at least two years and the child provided care that if not provided, would have required nursing home care for the parent.

The bottom line: if you are caring for a loved one or receiving care from a loved one, a care contract is highly recommended. Before entering into such a contract, it is important to discuss it with your CPA since any payments made are likely taxable income to the caregiver. As always, be sure to consult with an experienced elder law attorney when considering a caregiver contract.