How Personal Services Contracts Serve as a Planning Tool for Long-Term Care Medicaid Eligibility

Last updated: February 15, 2021

According to a report by the AARP Public Policy Institute and National Alliance for Caregiving (NAC), more than 34 million Americans served as informal (unpaid) caregivers to an individual 50+ years of age in the previous year. Often it is the adult children that provide care for their aging parents, whether it be minimal assistance with daily living activities due to the natural process of aging or more extensive care resulting from the progression of Alzheimer’s disease or a related dementia. As care needs become greater, it is not uncommon for informal family caregivers to quit their jobs to provide the level of care that is needed. Family caregiver contracts provide a win-win situation; the caregiver is able to be compensated for the care he / she is providing and the elderly individual receives the care he / she needs.


What are Family Caregiver Contracts / Personal Care Agreements

Family caregiver contracts, also called personal care agreements, elder care contracts, and personal services contracts, are written agreements between a caregiver and care recipient. While these contracts are usually between family members, such as an elderly parent and adult child, it is not required that the two individuals be related. This contract clarifies the relationship between the caregiver and care recipient, establishes clear expectations as to what services are to be provided (i.e., personal care assistance, transportation to physician appointments, and housekeeping), states when and where care will be received, and includes the care recipient’s rate of pay and frequency of payment. Essentially, personal care agreements protect all parties involved.


Personal Care Agreements and Their Importance to Medicaid Eligibility

  Receiving money from a care recipient without a personal care agreement in place will very likely jeopardize their ability to obtain Medicaid assistance.

Personal care agreements are particularly important if an elderly individual might require long-term care Medicaid, such as nursing home care, in the future. This is because Medicaid has an asset limit, which for most states, is $2,000. (To see state specific asset limits, click here). To prevent seniors from “gifting” their assets over the established limit in order to become asset eligible, Medicaid has a 5-year look back rule (2.5 years in California). During the “look back” period, all past asset transfers immediately preceding one’s Medicaid application date are scrutinized to ensure they were not “gifted”. If an applicant has violated this rule, a penalty of Medicaid ineligibility will result.

In the case of a long-term care Medicaid applicant paying a caregiver without this formal contract in place, Medicaid most likely will consider these payments as gifts, and hence, in violation of the look back rule. A personal care agreement legitimizes the reason payments are being made to the individual, or stated differently, offers proof that money is being paid by the Medicaid applicant for receipt of care services. If only an informal verbal agreement has been made, there is no proof as to why the individual is receiving money from the Medicaid applicant. In addition to the contractual agreement, caregivers should keep a daily log detailing the services provided, the hours worked, and payments received. This provides further proof of the relationship between the Medicaid applicant (care recipient) and the caregiver, should Medicaid need it.

Even if care recipients do not foresee themselves needing long-term care Medicaid in the future, personal services contracts provide a safeguard in the event that they do. For seniors who are over Medicaid’s asset limit, but require care assistance, these contracts serve as a Medicaid planning tool, as they essentially allow seniors to “spend down” their extra assets without violating Medicaid’s look back rule.


How Do Personal Care Agreements Work

Personal care agreements formally establish a business relationship between the care recipient (employer) and caregiver (employee). Based on the terms and conditions of the agreement, which must be in writing, the caregiver is compensated for providing care services. As mentioned above, personal care agreements offer protection against violating Medicaid’s look back rule. Furthermore, they help to prevent family conflict, as the contract clearly states who will be providing care for the individual in need and how much the caregiver will be paid.

It is very important that the established rate of pay is reasonable. Put another way, the pay rate cannot be higher than the going rate for that type of care in the area in which one resides. While payments can be made periodically, such as weekly or bi-weekly, in some cases, one large lump sum payment can be made. To be very clear, a caregiver cannot be retroactively paid. This means payment cannot be made for services provided prior to the establishment of the contract. Instead payments must be pay-as-you go, or in the states where lump sum payments are permitted, the lump sum “pre-pays” for future care services, essentially for the rest of the care recipient’s life. (Not all states allow lump sum payments, and instead may view this type of payment as a gift, which violates Medicaid’s look back rule.)

It is vital that lump sum payments be calculated correctly. Incorrectly calculating the payment is cause for Medicaid to consider it a gift, even in the states that allow for this type of payment. Therefore, it could violate the Medicaid look back rule and result in a period of Medicaid ineligibility. A lump sum payment is calculated using two factors; a reasonable hourly pay (market rate) and the life expectancy of the care recipient using an actuarial life table (a table that calculates the remaining life expectancy of persons at various ages). If a Medicaid recipient dies earlier than the calculated life expectancy, the remaining funds may need to be paid to Medicaid.

Family caregiver contracts must be signed by both the caregiver and care recipient. In some states, notarization is required in order for it to be Medicaid compliant.


For Whom Do Personal Care Agreements Work?

Most commonly, personal care agreements are established between an aging parent and an adult child. However, these contracts are also created for grandchildren caring for grandparents, nieces and nephews caring for aunts and uncles, and siblings caring for siblings. This type of contract is often between two family members, but the caregiver does not have to be related to the care recipient. Rather, the care recipient could be a close friend or a private caregiver.

While it isn’t forbidden for a personal care agreement to be between spouses, if the purpose of the contract is to “spend down” excess assets to meet Medicaid’s limit, this technique will not work. This is because all assets of a married couple are considered jointly owned. For other ways for married couples to lower countable assets for Medicaid eligibility purposes, click here.


What Should Personal Caregiver Agreements Include?

Personal care agreements should include the following information:

Services to be Provided
All tasks and duties that are expected of the caregiver need to be included in the personal care agreement. Examples include light housecleaning, laundry, meal preparation, go grocery shopping, assisting with daily living activities, and providing transportation to medical appointments and social activities. In addition, it’s important to indicate the location in which services will be provided, such as the senior’s or caregiver’s home.

Frequency of Services
How often (how many days a week) and for how long (how many hours at a time) services are to be provided should be included in the contract. The terms can be left somewhat flexible since care needs tend to change over time. For example, the contract might state, “a minimum of 20 hours per week” or “a maximum of 40 hours per week”.

Payrate and Frequency of Payment
The contract must include the caregiver’s rate of pay, which as mentioned previously, must be no more than the going rate in the area in which one resides. Also included must be how often the caregiver is paid. For instance, is the caregiver paid weekly, bi-weekly, once a month, or was the payment made in a lump sum?

Start Date / Length of Agreement
The date that care will begin needs to be included in the agreement. Remember, it must be a future date; the contract cannot be backdated. Also, it is important to include how long the agreement will remain in effect. This may be short term, such as just a few years, or for the life of the individual.

Modification / Termination Clause
A clause allowing modification of the personal care agreement when both parties agree to the changes should be included. If the agreement is long term, it is highly recommended that the agreement be reviewed, and modified as needed, on an annual basis. A clause that allows for termination of the agreement is also recommended.

The personal care agreement must be signed by both the care recipient and the caregiver. In some states, notarization may be required for validity purposes.


Common Mistakes Made in Personal Caregiver Agreements

When creating a formal personal care agreement and paying a caregiver, even a small mistake can result in a denial of long-term care Medicaid coverage. Below are common mistakes that are made (and should be avoided):

• Paying a caregiver retroactively. Remember, care agreements are not intended to pay a caregiver for care that has already been provided. Instead, the agreement is created with a start date for future care services.

• The caregiver does not keep a daily log of services provided and payments received. Sometimes this log is needed for Medicaid as further proof that payments were made to the caregiver for care services rather than given as a gift.

• Rate of pay is not reasonable. If pay is higher than the going rate for the type of care that is being provided, Medicaid may consider the payments as gifts.

• Being unaware of the rules in the state in which one resides. For instance, some states require that the signed agreement be notarized, and some states do not allow for a lump sum payment for services.


Is a Lawyer Needed to Create a Personal Care Agreement?

No, it is not necessary to hire an attorney to create a personal care agreement, but in some situations, it is highly recommended that the advice and guidance of a professional Medicaid planner be sought. This is particularly true if the care recipient plans to apply for long-term care Medicaid in the future. If a personal care agreement is not drafted properly, a Medicaid applicant may unknowingly violate Medicaid’s look back rule and be penalized with a period of Medicaid ineligibility. Medicaid experts are aware of the specific rules regarding personal care agreements in the state in which one resides and can help ensure the contract is Medicaid compliant. For persons who plan to make a lump sum payment, it becomes even more important to consult a professional for guidance due to the higher risk of the payment looking like a gift, and hence, violating Medicaid’s look back rule. Find a professional Medicaid planner here.

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