Taking care of an aging parent can be a full-time job. Adult children may have to give up paying jobs in order to provide care. Even if they don’t, they may still devote hundreds of hours of their time and make sacrifices in many other ways.
Often, aging parents want to find ways to compensate their caregiver children. Unfortunately, this is more complicated than it seems, because many techniques have tax or other consequences that aren’t obvious at first glance. For instance:
- Gifts to children. You can compensate your children directly through gifts of money. However, you’ll need to be aware that gifts of more than $13,000 in a calendar year can make you subject to a large gift tax, and even smaller gifts can complicate financial or Medicaid planning. There are often ways around this, but you’ll want to talk with an attorney to determine the best method.
- Gifts in your will. You can leave assets to a caregiver child in a will or trust. This can be a good idea, but it can also lead to conflict between siblings or other family members if the caregiver is being given a much larger portion of your estate. Thus, it’s usually wise to explain your reasoning to any other children or family members who might be upset – communication between family members now can prevent problems later.
In addition, you’ll want to make sure the caregiver child is not involved in drafting or advising you on your estate plan, because this can make it easy for other beneficiaries to challenge the will later by claiming that the caregiver exercised undue influence over you.
- A caregiver agreement. Caregiver agreements are contracts between a parent and a family member in which the parent agrees to reimburse the family member for personal care services, essentially by paying a salary. They are sometimes referred to as personal care contracts. These agreements have become increasingly popular in recent years because they allow parents to compensate caregiver children fairly without having to incur gift tax or make an unequal division of their estate when they write their will.
Another advantage to caregiver agreements is that they remove assets from your estate, which can help with estate tax planning and Medicaid planning. On the other hand, they must be drafted carefully so the IRS won’t challenge them, and any “salary” paid to the children must be reported as taxable income. We’d be happy to advise you on whether such an agreement makes sense in your particular situation.
- Giving your child your house. If you don’t have cash (or don’t want to use cash) to compensate a child, another option is to give the child your house. You can make the child a co-owner of the house, or you can transfer the house outright and retain a life estate, meaning you have the right to live there for the rest of your life. If the child has lived with you for at least two years, transferring a house can have Medicaid planning advantages as well.
However, transferring a house can have serious tax and other consequences, so it’s important to consult with your attorney before taking this step.
- Life insurance. Another option is to take out a life insurance policy in the caregiver child’s name. The benefit of this strategy is that the policy proceeds will go directly to the child, avoiding probate. However, a life insurance policy for an older person can be quite expensive.