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Many seniors ‘hiring’ their children to take care of them

As people get older, they often hire people to perform services for them, such as housekeeping, cooking, driving, paying bills and personal care.

But what’s new is that a lot of seniors are hiring their own children. They’re signing contracts with the children specifying what services will be performed and how much the children will be paid.

It’s not that children don’t love their parents and wouldn’t help them anyway, but these contracts can have significant estate planning benefits.

Estate and gift tax. If the parents simply gave their children the same money – either during their lifetime or in a will – the money could be subject to estate or gift tax. But by providing it under a contract, the parents can get the money out of their estate without these taxes coming into play.

Medicaid. Recent changes in the law have made it harder for parents to qualify for Medicaid by giving significant assets to their children. But generally speaking, if you give assets to children under a service contract, this won’t disqualify you from Medicaid.

Peace in the family. When one sibling takes primary care of the parents later in life, it can lead to family tensions – either because the caregiver resents the other siblings for not helping more, or because the parents reward the caregiver with gifts or special bequests, which make the other siblings resentful. Such stresses can lead to hard feelings, disputes or even a will contest. Compensating the caregiver through a contract can head off this type of problem.

How much should a caregiver be paid? This can depend on a lot of factors. A good way to start is to make a list of what the caregiver will do, then contact some local home-care agencies and see what they charge for similar services.

Parents might be tempted to pay a family caregiver much more than the “market” rate, because this would enable them to get more money out of their estate. However this is usually not a good idea because the government could challenge the contract – and the tax savings – and claim they’re not legally valid.

Some parents arrange to pay a caregiver a single lump sum up front based on their life expectancy. This can be a good way to get money out of an estate quickly. However, the parents will want to consider what would happen if the child, who has already received the lump sum, fails to provide the care that has been promised or becomes unable to do so. (For this reason, some parents pay a lump sum but put it into an escrow account.)

There are some downsides to these contracts. For one, the money paid to the caregiver is “income”, and the child must pay income tax on it. And in some cases, the parents must withhold Social Security and other payroll taxes.

Of course, some people just feel funny about the idea of money changing hands for the care of a family member. But again, it’s not that the child wouldn’t provide these services anyway. The contract is really just a method – like any other good estate planning vehicle – of enabling parents to provide as well as possible for the child in the long term.

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