A personal services contract, or a caregiver agreement, is an agreement between two persons, typically a parent and adult child, in which the adult child agrees to provide various personal services to the parent for a period of time typically measured (but not necessarily) by the parent's life expectancy pursuant to the applicable mortality tables.

The personal services contract allows the parent to appropriately spend down assets in a manner that does not create any penalty with respect to the parent ultimately qualifying for Medicaid benefits, usually for the institutional (nursing home) care program administered by Medicaid.

Whenever a personal services contract or a caregiveragreement is utilized in a Florida Medicaid or Veterns Administration ("VA")Planning case, there are always questions regarding income taxes.  When, and to what extent, does the carerecipient get to deduct the payment or payments?  When, and to what extent, does the caregiverchild have to recognize taxable compensation or income?

Section 61(a) of the Internal Revenue Code ("IRC")defines "gross income" as compensation for services... .  Thus, it is clear that when a caregiver childis paid on a monthly basis, with the actual compensation following the dates ofservice, the caregiver child will have to recognize taxable compensation to theextent of what he or she receives in a calendar year.

How do the income tax consequences change when the parentcare recipient wants to pre-pay for all future services?  The Florida Medicaid Program and the VAProgram allow an applicant for Medicaid Institution Care Benefits to reduce hisor her spend-down amount by a lump sum payment for future care services -accelerating the time that an individual can qualify for Florida Medicaid or VAbenefits institutional care benefits, and preserving assets for the family'suse in providing continuing care for the care recipient.  But what if the caregiver child does not havea good history of managing money, and the parent care recipient wants toprotect the compensation plan from advance spending by the caregiver child byutilizing an immediate annuity as part of the payment structure; does theimmediate annuity provide an effective solution?  It is my opinion that it does!

To illustrate, assume that Mary Contrary is age 77, andresides in an assisted living facility. Her daughter, Emily Dogood, assists her twice a week by providing threehours of personal care needs per visit. The personal care needs include bathing assistance, laundry services,medication management, and transportation to doctor's appointments.  Based on comparable services in thecommunity, Emily's services are reasonably priced at $16.00 per hour.  Over her Medicaid life expectancy, 10.96years or 131.52 months, Mary expects to receive $54,496.00 worth of personalcare services from her daughter, which equals $416.00 per month.

With Emily not having a good money management history, Marywas concerned that Emily would pre-spend the compensation if she received a$54,496.00 lump sum payment.  Afterreceiving some advice from her Jacksonville Florida Elder Law attorney, Marydecides to purchase an immediate annuity for $49,250.00, which provides 131guaranteed monthly payments of $416.00.  Maryis the owner, annuitant, and payee of the annuity.  After the caregiver agreement is executed, Marytransfers the ownership of the immediate annuity to The Coleman Law Firm, asescrow agent, pursuant to the terms of the personal services contract, or caregiveragreement, and the accompanying escrow agreement.  For convenience purposes, The Coleman LawFirm would immediately change the monthly payee from Mary to Emily.

What are the income tax ramifications of the proposedtransaction?  Is Emily required torecognize taxable income/compensation to the extent of the value of theimmediate annuity?  We believe the answeris "no."  Emily will only needto recognize taxable income/compensation to the extent that she receivespayments in a given calendar year.  Maryhas "spent down" the cost of the annuity (i.e., $49,250.00) and ispositioned to qualify for Medicaid or VA benefits at a much earlier time thanshe othewise would be.

Our opinion is supported by the following Tax Court and FederalCircuit Court cases of Sproull v. Commissioner, 16T.C. 244 (1951), affd. 194 F.2d; Centre v. Commissioner, 55T.C. 16 (1970); Minor v. United States, 772 F.2d 1472 (9th Cir. 1985);and Childsv. Commissioner, 103 T.C. 634 (1994).  See IRC Section 83.  Taken together, these cases stand for theproposition that the person who performs personal services is not required toinclude in his or her gross income the fair market value of any property, untilhe or she has an actual beneficial interest in such property, to the extentthat he or she can transfer the property without a substantial risk orforfeiture.  In Emily's case, she has nobeneficial interest in the immediate annuity, except to the extent that shereceives actual monthly payments.

If you may have a parent who is facing the prospect of a skilled nursing home confinement, you may want to explore whether a personal services contract may be appropriate for your family's circumstances.  If this or other Medicaid planning is of interest to you or your family members, please contact the Coleman Law Firm, a Jacksonville Florida Elder Law Firm, to schedule a consultation to discuss how your family member may benefit from Medicaid qualification, or the use of a personal care contract.