Medicaid Planning and Personal Services Contracts Issues
A Radio Interview of Attorney John R. Frazier by Attorney Joseph Pippen
A complete transcript of the program begins below:
Attorney Pippen:
Let’s go to Attorney John Frazier. Good Morning, John.
Attorney Frazier:
Hey, Joe. How you doing today?
Attorney Pippen:
I’m doing great. So what are we talking about today?
Attorney Frazier:
Today I was going to talk about Medicaid planning and personal services contracts issues. The use of a personal services contract as a Medicaid pre-planning strategy for individuals who are still living in the community and want to continue to live in the community. Under Florida law, if you give assets away to a non-spouse, a child, a friend within five years of a Medicaid application, the state of Florida presumes that that was a transfer done for the purposes of obtaining Medicaid benefits, even though it may be for a completely different reason, like a birthday gift or some other sort of transfer or some other sort of gift. There’s actually a presumption against Medicaid applicants within five years of the Medicaid application.
However, under Florida law, we have something called a personal services contract, which is a payment to a caregiver. These contracts have a variety of different names, but they all really mean the same thing under Florida law. Sometimes they’re called a family caregiver contract. Some attorneys refer to them as a services contract, a personal care agreement, a caregiver agreement, and some people just abbreviate it PSC for personal services contract.
Under Florida law, we have a case, a 1998 case, Thomas versus the Florida Department of Children and Families, which authorizes these kinds of payments for family member caregivers. The state of Florida, the Florida Department of Children and Families, under this case law, there are several different criteria in order for this to work and be accepted by the Department of Children and Families if the person ever has to apply for Medicaid.
The first criteria is that the contract must be in writing and signed by both parties. If the client, the person who may apply for Medicaid, cannot sign, typically the power of attorney would be able to sign on behalf of the client. The contract also must be equal to or less than the life expectancy of the Medicaid applicant. The contract cannot be longer than the person’s life expectancy under the Actuarial Social Security Life Tables. The contract must also be for future services. A caregiver cannot be paid for services that they’ve done in the past for the person, and the payment price must be reasonable. DCS would take a look at the average cost of geriatric care managers, their hourly rate in the region, and as long as the payment price, for example, $25 an hour or $20 an hour, those would all be reasonable dollar amounts, based on the average cost or the average price that a caregiver manager or geriatric care manager would charge, at least in our area.
As an example, let’s say that you have an 80-year-old woman still living in her house, and you’ve got a daughter who’s spending lots and lots of time taking care of her mom. An 80-year-old person would have an 8.94 life expectancy under the Social Security tables. So we could do a seven-year contract and pay the daughter $25 an hour for 30 hours a week. Over the term of the contract, that would be $273,000, quite a bit of money, but the state of Florida would view that as reasonable. Then we could pay that caregiver, it would be $812.50 per week or $3,250 per month. And if the term of the contract was fulfilled, it would be a seven-year contract with a total value of $273,000. And the state of Florida would actually accept that.
This is a very powerful tool in Medicaid planning and personal services contracts issues. It’s not available in all states, and we’re actually very, very lucky that we can use this strategy here in Florida.
Attorney Pippen:
All right, John, suppose the circumstances are different, and we’re not really talking about a Medicaid case. We’re talking about a child moving in with parents. Maybe they gave up their job, and maybe they’re coming from another state, and the parent needs caregiving services. So you can’t really make a gift because a gift would disqualify you for Medicaid later. But the child has given up a lot and wants to be paid for their services in a home and stay in the home as long as they can. So how does a care contract work like that?
Attorney Frazier:
It would be a very similar to that example that I gave to you. We would always want to keep in mind that if you have a person who needs care in the house, they certainly might need care in an assisted living or nursing facility at some point. It would still really end up being the same thing, that the family member could be paid. We would draft a contract, which would outline an hourly rate and number of hours worked per week. And if we ever had to apply for Medicaid, we would just make sure that we would stay within those parameters of reasonableness. For example, we wouldn’t want to pay a family member caregiver a hundred dollars an hour, for example, unless the person were a licensed physician. So I think if you have a physician or a nurse who is a caregiver, you might be able to charge a much higher rate and transfer out quite a bit more money under those circumstances.
Attorney Pippen:
So the money paid to the caregiver in the home, say weekly or monthly salary, would not be counted against them when they go for the Medicaid contract later.
Attorney Frazier:
Exactly. It is also very important to remember that this would be considered income under the Internal Revenue Code. Section 61 of the Internal Revenue Code basically says that any form of payment or transfer to another person is classified as income, unless there’s another exception in the Internal Revenue Code. The biggest exception would be under Section 102 of the Internal Revenue Code, which talks about gifts and inheritances. That’s the plus side of gifting is if we give the assets away, there’s no income taxes on that transfer. And also if the person inherits the money, no income taxes on that either. So that’s another important consideration, income taxes. It’s very, very important to take a look at the income tax consequences of these contracts, especially if the person has some other form of income, and they’re already paying income taxes. But if the person, for example, is unemployed, that would be the ideal person to be a caregiver under a circumstance like this.
Attorney Pippen:
To think further on Medicaid planning and personal services contracts issues John, I think the trap some people fall into, let’s say a child has a power of attorney and healthcare surrogate, and they volunteer hour after hour after hour just because they love their parent, doing services for their parents, shopping for the parent, taking the parent here and there. They do spend a lot of time because the parent is unable to travel themselves or make appointments themselves or whatever.
So the power of attorney, the loving child power of attorney, does all of these services. And then at the end of the day, when parent dies, the power of attorney would come to me and say, “Hey, Joe, I’ve kept track of my hours. I was performing all these services. Can I get paid now?” I don’t know if you’ve heard that story or not, but I hear that a lot. And I say, “Well, look, did you have an employment contract? Did your parents sign an employment contract with you? Did you have an agreement in writing, something you’d be paid for your services? Because you can be a power of attorney. That doesn’t automatically, you do stuff using your power of attorney, you can get paid.”
And then sometimes the parents will just make a gift of gratitude for all the things the child has done. The problem is you don’t really get paid unless you have some type of an agreement, number one. Number two, if you make a gift, then you disqualified yourself for possible Medicaid benefits for a period of time. Have you experienced that?
Attorney Frazier:
I’ve experienced that whole scenario many, many times actually. Well, I think because you work primarily in estate planning, you would get that question much more than me. In my cases, most of my clients are looking to apply for Medicaid immediately, and we’re dealing with a family member in a nursing facility primarily. It is often the case that one person, typically the power of attorney, is doing all the work, for the most part. The other family members are not doing anything. And in those cases, pretty much most if not all of them, we will use a personal services contract to pay the caregiver at that time. It is something that I’ve literally done thousands of these contracts, and all of my cases have been approved up to this point. I’ve done over 3000 Medicaid cases. Thus I have deep experience in Medicaid planning and personal services contracts issues.
Attorney Pippen:
Well, I think the purpose of my wanting you to talk about this topic today was because there are many… I wanted it reach the caregiver child who’s in the home taking care of parent, their parent, knowing that it’s imminent, that it’s only a matter of time before the parent has to go into a nursing home. But they’re in there trying to help the parent to prevent that as long as they can by giving them care and transportation and assistance. There is a way they can get paid for that, and it’s all legit, on a monthly basis.
Attorney Frazier:
Absolutely,
Attorney Pippen:
And then when the time comes for Medicaid, yeah. It’s good to orchestrate a whole plan concerning this, I think.
Attorney Frazier:
Yeah. Yeah. I think it’s very important to think about those things. Often times our powers of attorney are actually employed working 40 hours a week and then spending another 20 hours a week dealing with their family member who’s having health problems, and the person, under those circumstances, you definitely want to be looking at this personal services contract so you can get paid for your time and effort. It’s totally permissible, totally legitimate.
Now, if you do the gift or the transfer, although there is a presumption that if it’s done within five years, it’s a presumption that it was done for Medicaid purposes, there is a rebuttable presumption. I don’t know that I’ve ever actually been successful as a result of the Deficit Reduction Act in 2007. The rules have become much stricter regarding transfers, so I think it would be very risky to just do a gift and think that you’re going to be able to rebut that presumption.
What the state of Florida does under those circumstances is they say… Well, let’s say there’s a $20,000 gift. The government is going to say, “well, you have to disclose that on the Medicaid application if it’s within five years.” The caseworker is then going to say, “Well, you have to return that $20,000.” And if you don’t return it, there’s going to be a penalty period, which is based on something called the divisor, based on the average cost of care in a skilled nursing facility, which is $9,485 per month. So you would take that $20,000 transfer, divided by the divisor of $9,485, and that would give you a little bit more than two months of disqualification. So it is risky just do a gift and not incorporate that into a personal services contract and then pay taxes on it. If you do it properly, that transfer, that $20,000 transfer, would be totally permissible. The downside, though, is the person would have to pay income taxes on it.
Attorney Pippen:
John, does a contribution to a church count as a gift on the look-back analysis?
Attorney Frazier:
Technically, it does. But I think that you would probably have a better chance of rebutting that presumption if you had a systematic… Let’s say that you gifted $5,000 a year to the church. I think you would be in a much better position to rebut that presumption. I do tell clients, and many of my clients will mention that. They say, “Well, I give a certain dollar amount to the church every month or every year.” I tell them that they would need to stop that at this point because they’re on notice now, when you’re applying for Medicaid, I’ve advised them that it’s considered a transfer for Medicaid purposes, and I advise clients at that point to stop that type of gifting, once they’ve contacted me for Medicaid planning.
Attorney Pippen:
So if they gave $10,000 to a church, they could be disqualified for Medicaid benefits for one month, basically.
Attorney Frazier:
In theory, yes. But again, I think if they had a systematic plan of gifting to the church, I think you would be in a much better position to rebut that presumption because, clearly, it was not done for the purposes of obtaining Medicaid benefits. Now what the government does, they have a form. If the person is looking to rebut the presumption that it was done for the purposes of Medicaid purposes, this DCF form asks about, “Well, what was the person’s health at the time of the gift?” They want to know all the circumstances surrounding the gift. And then you do have a possibility of rebutting that presumption. Again, I think the possibility would be much stronger if there was a pre-established gifting plan, and then, let’s say, the person had a stroke. At that point, if the family contacted me, I would say, “Well, you need to stop the gifting at this point, and I think we have a pretty good chance of rebutting the presumption because the person was held healthy up until the time of the stroke.”
Attorney Pippen:
We’re going to run out of time here in a few minutes. We stress on this show that it’s very important to have a durable power of attorney that gives the power to create this personal service contract. And it’s very important to update power of attorneys.
Attorney Frazier:
Absolutely. Absolutely.
Attorney Pippen:
What if a power of attorney goes to son or daughter? I mean, there are two people named in the contract, when they both have equal power. Can they both be named in a personal service contract?
Attorney Frazier:
Oh, absolutely. In one case, I did eight personal services contracts for eight different family members. They were small contracts, but the state of Florida did approve that. And I’ve done many, many cases where we’ve done more than one personal services contract, so totally permissible. And I do recommend when a person does a power of attorney, I think you probably do too, is to put that “or” language in there. If you have more than one attorney in fact, because if you say and, and you require the signature of both powers of attorney, can create a deadlock situation where you have a disagreement. And if it requires a signature of both, and I’ve actually seen that happen before. Power of attorney that said “and”, requiring both signatures, there was deadlock, and it resulted in the person being placed under a guardianship. Very important to think about that, I think, also.
Attorney Pippen:
John, can a person who’s granted a power of attorney create a personal service contract for someone who’s not granted the power of attorney.
Attorney Frazier:
Absolutely. We do that all the time too. And typically because my Medicaid applicants are having fairly serious health problems for the most part, I would guesstimate probably 50% of my Medicaid applicants have memory issues, often times dementia and Alzheimer’s. So it’s totally permissible for that power of attorney to sign on behalf of the Medicaid applicant. And that’s what we almost always do. With our power of attorney, that authority is included in the power of attorney. It’s totally permissible for the attorney in fact to sign off on personal services contracts for more than one person and more than the attorney in fact, also. So the other children, for example, could be paid too. That pretty much wraps it up for the topic of Medicaid planning and personal services contracts issues.
Attorney Pippen:
John, give us your contact information. Anyone wants to talk further about Medicaid planning.
Attorney Frazier:
Okay. The office number is (727) 586-3306, extension 104. My cell phone is (727) 748-5374. And my email address is John, john@attypip.com.
Attorney Pippen:
All right. Give me your cell phone number one more time.
Attorney Frazier:
(727) 748-5374.
Attorney Pippen:
All right. Very good.
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