In our last post, we began discussing some of the issues surrounding paying family members to provide caregiving services. Here, we want to continue that discussion by talking about potential tax implications and how these arrangements may affect Medicaid planning.
Once a decision has been made to pay a family member for providing care, one of the first questions to address is how to pay that individual. You could make arrangements to pay the caregiver an hourly or weekly wage, but doing so might have tax implications that you would rather avoid.
Generally speaking, paying an employee over a certain threshold will obligate the employer to pay payroll taxes for Social Security, Medicare, and unemployment benefits. Depending on the state, taxes might also become due for workers' compensation. Paying a caregiver in the form of an annual tax-free gift might be a better option in some circumstances.
When it comes to the issue of Medicaid, it is very important to be careful in how payments are structured. Qualifying for Medicaid became much harder a few years ago. In 2006, federal legislation went into effect that provided a five-year period in which Medicaid will look back for any transfer of assets that might disqualify someone from receiving Medicaid benefits.
In order to protect your ability to qualify for Medicaid, you may want to prepare a contract showing the precise employer/employee relationship and documenting any payments so they are not confused as attempts to hide assets. Keeping the payments near a market rate for that type of work being performed would also be important in avoiding the appearance of impropriety.
These arrangements can become quite involved and may present many legal pitfalls, so it is advisable that you seek out an experienced estate and Medicaid planning attorney for legal guidance.
Source: The Wall Street Journal, Should You Pay a Relative to Take Care of Mom?, Anne Tergesen, 12/11/10