Many remember the iconic American sitcom The Brady Bunch from the late 1960s and early 1970s that brought together a blended family with six children and explored many “life lessons.” Greg, Peter, Bobby, Marsha, Jan, and Cindy often exhibited the common theme of searching for the approval of their parents, Mike and Carol. Fast forwarding the Brady family forward forty years to current times it is possible that the roles of family would be reversed and one of these dependable children, probably Jan, could be in the position of caring for her parents as they became faced with a long term illness. Unfortunately, due to recent changes in Illinois law1, Jan or any of the Brady children fulfilling the role of caregiver is in very difficult position. In Illinois, caregiver children have been presented with a landscape filled with hazards that could prevent parents from receiving facility based long term care benefits in the future. Providing gratuitous care, providing care for payment, and providing care without appropriate documentation are just a few of the considerations that could present issues. Essentially, laws and regulations are standing in the way of a family simply being a family.
Elder Law practitioners, commonly encounter families who are providing part or full time care to parents rather than placing that family member in an assisted living facility or nursing home for a variety of reasons including a desire for the family member to remain at home, cost-saving/financial reasons or family/cultural tradition. Sometimes family members are able to provide this care for free, but when the need for care increases to the point that the caregiver child has to quit their job or their spouse has lost the job that was supporting the caregiver’s family, it often becomes necessary for mom or dad to begin compensating their child for care. While this may seem like a logical step and a private decision among family members, it can result in large penalties should mom or dad later move to a nursing home and need to apply for Medicaid benefits.
To emphasize the consequences that could be imposed on a senior, consider this scenario. Mike Brady has been diagnosed with Alzheimer’s and needs 24 hour supervision and assistance with bathing, dressing an ambulating. It is too much for Carol to handle as she is failing herself. Jan, the only child that is still single, agrees to quit her job and move into the Brady home. In exchange, Carol agrees to pay her $3,000 per month. After two years, Mike’s condition has progressed to the point he needs skilled care in a nursing facility and Jan applies for Medicaid on his behalf. The Bradys only have $50,000 in the bank and Mike would normally be eligible for Medicaid to pay some or all of his $6,000 a month nursing home bill. However, the Department of Human Services imposes a 12 month penalty period of ineligibility on Mike based on the money he and Carol paid to Jan. The Department considers the payments to Jan as non-allowable gifts2. This means that the Brady’s will have to pay privately at Mike’s facility for the next twelve months before any of Mike’s care will be paid for through the Medicaid program. As this is more money than Mike and Carol have left, they may have to look to their kids for the extra funds.
Because this practice is fairly common among families and the consequences are so severe, it is something that all attorneys should be aware of when counseling their clients. The Brady Family’s major financial dilemma could have been avoided with pre-planning for both Federal and State public benefits. This planning is completed through implementing a series of estate planning documents including the personal care contract.
This new pitfall for families was created on January 1, 2012, when the State of Illinois implemented revisions to Title 89 of the Administrative Code in response to the Federal government’s Deficit Reduction Act of 2005. The Code states as follows:
“Transfers of assets for “love and affection” are not considered transfers for FMV. A transfer to a friend, family member or relative for care provided for free in the past is a transfer of assets for less than FMV. The Department presumes that services, care or accommodations rendered to a person by a friend or family member are gratuitous and without expectation of compensation.” 3
Therefore, the Department will presume that the family caregiver intended to provide the services for free unless certain factors are met. The following is a checklist that, if met, should prove to the Department that the care was meant to be provided for compensation and that payments to the family member caregiver should be allowable:
There must be a Personal Care Agreement pre-dating the delivery of care. Most importantly, there must be a written contract in place prior to or concurrent with the date care services and payments begin. The Administrative Code requires that there be “credible documentary evidence that preexists the delivery of care, services or accommodation showing the types and terms of compensation.”4 Similarly, the Policy Manual (the instructional guide that the State’s Department of Human Services caseworker’s follow when reviewing a Medicaid application) specifically states that there must be a written agreement “executed prior to the receipt of services.”5
If clients have already been paying a family member for care without a contract in place, a plan to deal with the Medicaid penalties that have already been created should be developed as it is no longer possible to create a Personal Care Agreement after the fact to memorialize a verbal agreement under the 2012 Medicaid laws.6 A contract can then be executed to prevent penalties from continuing to accumulate in the future.
Payments must be for care provided, not care to be provided. Personal Care Contracts must require pay concurrent with services being provided. It is not permissible to create what is commonly referred to as a “Lifetime Care Contract” whereby a certain fee is paid upfront in exchange for care until the person’s death. Life Care Contracts have been used by attorneys in Illinois in the past, but are not likely to be permitted going forward.
There is no Illinois case law dealing directly with this issue, but it has been discussed in several other states. In Austin v. Family and Social Services Admin.,7 Austin paid a lump sum of $35,500 to the Mack family in exchange for care for the balance of her life. This payment was for future care and based on Austin’s life expectancy and $12 an hour for 15 hours a week. After making the payment, Austin actually moved to a nursing home and her care was provided primarily by the facility until her death. The Austin court referenced E.S. v. Division of Medical Assistance & Health Services, which argued that there was no fair market value to a “life care contract.”8 A major argument in the case was that a contract of this type is not for fair market value because “it could potentially lead to a great windfall to the caregiver if either the caregiver or the nursing home resident died before the resident’s life expectancy.9 If the caregiver died, his or her estate would be entitled to retain the full advance payment, and if the resident died, the caregiver him- or herself again would be permitted to retain the full advance payment; in either case, those funds would not have been actually earned by the caregiver.”10 The bottom line is payments must be made as services are rendered. Payments made in advance are likely to cause the State to assess a penalty period if the care recipient dies or moves to a facility before receiving the services.
Receipts, logs or other documentation that bolster the claim. It is important to document the services the caregiver is actually performing under the personal care agreement. Clients should therefore be counseled to keep a weekly log of every activity the caregiver undertakes. Obviously there are standard tasks of care that would be listed every week, but showing the variations or the ups and downs of the care is important to show that this agreement is followed from beginning to end. Though not required, a log is often requested by Department of Human Services caseworkers when reviewing claims. Further, the statute states that the presumption that care provided is gratuitous can be “rebutted by... contemporaneous receipts, logs or other credible documentation showing actual delivery of the care or services claimed.”11 A personal care agreement is only as strong as the documentation that is provided to support it. Therefore, maintaining an accurate log of the care provided in the same manner a professional care giving service would is important to the future care of the elder. In addition to the documentation that is necessary to support a personal care contract, appropriate tax filing is also necessary. Clients who enter in to personal care contracts should be referred to appropriate tax professionals to provide payroll services and “household employee” tax preparations.12
Compensation must not be in excess of the rates in the community. When determining the cost of the care to be provided, there is no rule, ethical or legal, that Jan has to provide the services to her parents at a discount, but there is a rule that she cannot overcharge.
The Administrative Code states that “Compensation paid in excess of prevailing rates for similar care, services or accommodations in the community shall be treated as a transfer for less than FMV [fair market value].”13 Additionally, the Worker’s Action Guide (another part of the manual the caseworker refers to when reviewing a Medicaid applications) advises that “To determine the worth of a service, use the average cost of that service from a provider on the open market. If the services were worth as much as the transferred resources/income, the transfer does not affect eligibility.”14 Obtaining quotes from facilities or local home health care agencies can provide guidance and prove that compensation is appropriate.
Possible Medicaid issues for the future. Because the Deficit Reduction Act15 changes have only been in effect since January 1, 2012, there are certainly issues and pitfalls regarding family caregivers that are yet to be uncovered. For instance, the Administrative Code states that “Transfers of assets for ‘love and affection’ are not considered transfers for FMV. A transfer to a friend, family member or relative for care provided for free in the past is a transfer of assets for less than FMV.”16 If a child decides that she can no longer care for her parent without compensation, will she be penalized moving forward, even if all of the appropriate paperwork is completed because she had been providing gratuitous care in the past? Will the Department of Human Services begin requiring proof that employment taxes were paid and income claimed by the caregiver child? Will the State seek legal action to recover funds from children who were paid for care without a contract in place? Will the same standards be applied to third party caregivers who may refuse to sign any paperwork?
1 The recent change in Illinois Law refers to the implementation of the Deficit Reduction Act of 2005 on January 1, 2012 and the implementation of the SMART Act on July 1, 2012.
2 A non-allowable asset transfer is defined for Medicaid purposes in the Illinois Department of Humans Services Policy Manual. The specific citation is PM 07-02-20(d) (2013). All policy manual citations may be found at www.dhs.state.il.us.
3 89 Ill. Adm. Code 120.388 (2013).
5 Illinois Medicaid Policy Manual, PM 07-02-20 b (2013).
6 89 Ill. Adm. Code 120.388 (2013).
7 Austin v. Family and Social Services Admin. 947 N.E.2d 979 (2011).
8 E.S. v. Division of Medical Assistance & Health Services, 412 N.J.Super. 340, 990 A.2d 701 (2010).
11 89 Ill. Adm. Code 120.388 (2013).
12 Personal Care Contracts subject the Elder to appropriate tax filings for household employees. The regulations surrounding this are found in IRS Publication 926. Household Employers Tax Guide, Publication 926 (2013). This guide can be found in PDF format for your clients at the following web address - http://www.irs.gov/pub/irs-pdf/p926.pdf.
13 89 Ill. Adm. Code 120.388 (2013).
14 A Medicaid caseworker is tasked with determining if the elder is receiving fair market value for all of their expenditures. It is imperative for a personal care agreement that one be able to prove that the service being provided to the Elder is given at market rates. The specific citation is WAG 07-02-20(b) (2013). All workers action guide citations may be found at www.dhs.state.il.us.
15 89 Ill. Adm. Code 120.388 (2013).
Gina Salamone is an attorney with Law ElderLaw, LLP in Aurora, Illinois where her practice is concentrated in elder law, estate planning and asset protection. She is 2004 graduate of Knox College and a 2007 graduate of the Northern Illinois University College of Law.
Zach Hesselbaum is an attorney with Law ElderLaw, LLP in Aurora, Illinois where his practice is concentrated in elder law, estate planning and asset protection. He is a 2005 graduate of Valparaiso University, a 2008 graduate of Valparaiso University College of Law, and a 2013 graduate of the DePaul University College of Law with a Master of Laws in Taxation.