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 caregiver agreement 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 care recipient get to deduct the payment or payments?  When, and to what extent, does the caregiver child 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 child is paid on a monthly basis, with the actual compensation following the dates of service, the caregiver child will have to recognize taxable compensation to the extent of what he or she receives in a calendar year.

How do the income tax consequences change when the parent care recipient wants to pre-pay for all future services?  The Florida Medicaid Program and the VA Program allow an applicant for Medicaid Institution Care Benefits to reduce his or 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 VA benefits institutional care benefits, and preserving assets for the family's use in providing continuing care for the care recipient.  But what if the caregiver child does not have a good history of managing money, and the parent care recipient wants to protect the compensation plan from advance spending by the caregiver child by utilizing an immediate annuity as part of the payment structure; does the immediate annuity provide an effective solution?  It is my opinion that it does!

To illustrate, assume that Mary Contrary is age 77, and resides in an assisted living facility.  Her daughter, Emily Dogood, assists her twice a week by providing three hours 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 the community, Emily's services are reasonably priced at $16.00 per hour.  Over her Medicaid life expectancy, 10.96 years or 131.52 months, Mary expects to receive $54,496.00 worth of personal care services from her daughter, which equals $416.00 per month.

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

What are the income tax ramifications of the proposed transaction?  Is Emily required to recognize taxable income/compensation to the extent of the value of the immediate annuity?  We believe the answer is "no."  Emily will only need to recognize taxable income/compensation to the extent that she receives payments in a given calendar year.  Mary has "spent down" the cost of the annuity (i.e., $49,250.00) and is positioned to qualify for Medicaid or VA benefits at a much earlier time than she othewise would be.

Our opinion is supported by the following Tax Court and Federal Circuit Court cases of Sproull v. Commissioner, 16 T.C. 244 (1951), affd. 194 F.2d; Centre v. Commissioner, 55 T.C. 16 (1970); Minor v. United States, 772 F.2d 1472 (9th Cir. 1985); and Childs v. Commissioner, 103 T.C. 634 (1994).  See IRC Section 83.  Taken together, these cases stand for the proposition that the person who performs personal services is not required to include in his or her gross income the fair market value of any property, until he or she has an actual beneficial interest in such property, to the extent that he or she can transfer the property without a substantial risk or forfeiture.  In Emily's case, she has no beneficial interest in the immediate annuity, except to the extent that she receives 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.