Keeping It in The Family

Many younger family members provide care to older family members. For instance, a mother might move in with her daughter, and the daughter might provide care to the mother in order to enable the mother to live at home instead of in a nursing home.

The care that the daughter provides to the mother might be quite extensive. The daughter might provide assistance with clothing, bathing, toileting, walking, as well as chore items, such as laundry and cooking. Being a caregiver is a lot of work.

There are a great many businesses that provide non-relative caregivers for a fee. A person could hire a caregiver on a hourly basis, which might cost around $25 an hour, or the person might hire the caregiver to serve on a live-in basis, which might cost around $200 a day, plus food and shelter for the caregiver.

Many of these non-relative caregivers are foreign-born individuals. The fact of the matter is, few Americans would want to perform this type of work for a non-relative.

But what if a family member does provide the care? Can the family member be compensated for the care that she provides in the same manner and at the same rate of pay as a non-relative caregiver?

The answer may depend based upon the context in which the question is asked. For Medicaid purposes, compensating a family member has become a fight. For tax purposes, the answer will depend on whether or not the agreement for compensation is in writing or not.

In the past few weeks, two tax courts have considered whether or not the senior could deduct the money she paid to her caregiver as a medical expense. Medical expenses can serve as an itemized deduction to the extent that the expenses exceed 7.5% of the taxpayer’s adjusted gross income.

If a caregiver’s services are prescribed by a doctor as being medically necessary, the cost of that caregiver may be deductible as a medical expense. Essentially, what the two decisions of the tax courts held was that in order for a family-member caregiver’s services to be deductible, the care must have been provided pursuant to a written care agreement. In other words, mom and her daughter must have a written contract pursuant to which the daughter will provide care for a fee to mom.

Medicaid has a similar rule. In order to treat a payment to a family member as compensation, and not a gift that would result in a period of ineligibility for Medicaid, the care that the daughter provides to the mother must be provided pursuant to a written care agreement that pre-dates the date the services are provided.

Having a written agreement to compensate a family member makes perfect sense to me. Without a written agreement, family members could simply collude to say anything they did was pursuant to some agreement they had.

Unlike the tax courts, however, Medicaid in recent years is failing to adhere to its own rules. While the rule says that compensation pursuant to a written agreement will not be treated as a gift to the family-member caregiver, the actions of the Medicaid office are the opposite.

Essentially, Medicaid is challenging all written caregiver agreements and making the applicant for Medicaid benefits litigate whether or not the compensation was actually a gift.

In my practice, I have rarely used caregiver agreements, but in my opinion, if there is a written caregiver agreement, if the caregiver keeps records of the work that he performed for the family member, if the compensation was at a market rate, and if the caregiver claims the compensation on his tax return, then I think the caregiver has proven that the compensation was payment for services rendered, and not a gift.


There is no issue that causes more confusion with the people I meet than the confluence of gift tax and Medicaid planning. When meeting with people, they will say to me, “Can’t my mom give away $10,000 a year without it causing problems with Medicaid and the nursing home?”

Medicaid planning is the process through which a person attempts to preserve a portion of his estate and qualify for Medicaid sooner than he would qualify for Medicaid without planning. Medicaid is a government-sponsored health insurance program for needy individuals. Unlike most health insurance programs, Medicaid will pay for the costs of long-term care, such as care in a nursing home or an assisted living residence.

Some people claim that millionaires qualify for Medicaid by planning with a lawyer. I’ve been an elder law attorney for over ten years now, and I have never had a millionaire qualify for Medicaid through planning.

The reason I mention this is because the $10,000-a-year gift thing is really an issue for millionaires. The gift amount is actually $13,000 a year and it is called the “annual exclusion gift.”

The annual exclusion gift permits a person to give away $13,000 a year to an unlimited number of people without reducing his lifetime credit against gift tax. So, Mr. Smith could give away $13,000 each and every year to every member of his family and every friend he has without reducing his lifetime credit against gift tax.

And what is the lifetime credit against gift tax? $5,000,000. In other words, Mr. Smith would have to give away $5,000,000 before he would use up his lifetime credit against gift tax. Only after Mr. Smith depletes his $5,000,000 would Mr. Smith pay gift tax.

It is the person who makes the gift who would pay gift tax if a tax were owed. The recipient of a gift never pays gift tax.

The annual exclusion gift is in addition to the $5,000,000 lifetime credit. So, for instance, if Mr. Smith gave away $13,000 to ten of his friends, he would not reduce his $5,000,000 lifetime credit. If, however, Mr. Smith gave away $14,000 to one of his friends, he would reduce his $5,000,000 lifetime credit to $4,999,000.

As you can see, most people do not have gift tax issues. While I don’t recommend giving away large portions of your money for no purpose, don’t let gift tax concern you. It is very unlikely that you will ever pay gift tax.

The Medicaid Office, on the other hand, could care less about the annual exclusion gift. If Mr. Smith gives away $13,000 within the five years before applying for Medicaid, Medicaid will punish Mr. Smith by making him ineligible for Medicaid benefits for a period of time, called a “penalty period.” If Mr. Smith gives away $13,000 to ten of his friends within the five years before applying for Medicaid, Medicaid will make Mr. Smith ineligible for Medicaid benefits for an even longer period of time.

Medicaid aggregates all gifts made within the five-year period of time prior to applying for Medicaid benefits and assesses a penalty period against the applicant based upon that aggregate gift number.

There is no acceptable amount of money that a person can give away without facing the potential of having a period of ineligibility for Medicaid benefits assessed against them. So, the lesson is, unless you have $5,000,000 don’t worry about gift tax but do worry about Medicaid issues. If you do have $5,000,000, worry about gift tax but don’t worry about Medicaid.


Almost every day a client requests that I draft a power of attorney for them. In most cases, the client chooses a family member (their spouse or a child) to be their power of attorney agent. Rarely does the client ask me about the liability or responsibility that the power of attorney agent is assuming.

The fact of the matter is, if power of attorney agents understood the potential liability and tremendous responsibility they were assuming by serving as a power of attorney agent, few people would be willing to serve. The same, however, could be said about being a parent. If people knew all the responsibility and potential liability there was to being a parent, the world would be a much lonelier place.

A power of attorney is a document that permits one person, called an “agent” or “attorney in fact,” to make financial decisions for another person, called the “principal.” A power of attorney is only effective when the principal is alive. Upon the death of the principal, the power of attorney document ceases to be effective. At that point, the executor of the person’s estate would be in charge of their finances.

An agent owes the duty of utmost duty of care to the principal with respect to financial matters. In other words, if the agent makes a poor decision with regard to the finances of the principal, the agent can be held liable for that poor decision.

Absent such a poor decision, the agent bears no personal liability for the debts of the principal. Stated differently, an agent is not liable for the principal’s debts.

With that said, some creditors may sue the agent for the principal’s debts. For instance, in recent years, I have seen nursing facilities sue the agent for the principal’s nursing home bill.

Typically, when a person enters a nursing home, the nursing home provides an admissions agreement to the potential resident. Since the potential resident is frequently in poor health, the nursing home provides this agreement to the resident’s representative, the power of attorney agent.

The agent then signs the admissions agreement, including the inevitable sections entitled “responsible party” or some similar designation, and if the resident is unable to pay and if Medicaid refuses to pay for the resident for any number of reasons, the nursing home will sue the resident and the power of attorney agent under the “responsible party” language of the admissions agreement.

Will the nursing home prevail in the end? Though I have no direct knowledge, I’m sure the lawsuit alone may lead to a settlement with the nursing home, so in that sense, the nursing home won.

Another issue for a power of attorney agent concerns other family members or friends of the principal. In many cases, other family members or friends of the principal will be suspicious of the actions of the agent. Is the agent taking money for himself? Why did mom pick son A to be her agent over me, son B?

Handling a principal’s financial affairs can bring a tremendous amount of scrutiny to the agent. Interested parties, such as family members, can request the agent to produce an accounting of the principal’s finances if the principal is mentally incapacitated.

All of this is aside from the fact that being an agent is a lot of work. It’s a lot of work to handle another person’s financial affairs and to handle those affairs with the utmost care.

Furthermore, in most cases, the agent does all this work for free. Unless a power of attorney specifically says that the agent can be compensated for his time, he cannot be compensated, unless the agent goes to court to obtain an order that says he can be compensated. Most powers of attorney documents fail to address the compensation issue, so the agent serves without compensation.

So, why would anyone serve as an agent? Why would anyone serve as a parent? Because they love the person. In most cases, it is a lot of unpaid hard work that only exposes the agent to accusations of abuse (often false), but most agents serve because they are helping a frail family member or friend whom they love.


In a last will and testament, a person typically nominates someone to be the executor of his estate after he dies. After death, the person nominated to be the executor doesn’t officially assume that role until such time as she submits the decedent’s last will and testament to probate before the surrogate in the county in which the decedent died domicile.

Once the executor is officially appointed to the role, she owes a duty of utmost care to the estate. Being the executor is a job that is filled with obligations and liability. Ultimately, if something goes wrong with the administration of the estate, it is the executor who is liable.

For instance, if the executor sells the decedent’s house for less than it is worth, it is the executor who is liable for the difference. If a beneficiary sues, the executor might be held liable for selling the house too cheaply. If property is lost or damaged, it is the executor who is responsible for the loss. If the executor fails to invest the assets of the estate properly and those assets lose value, it is the executor who will be held responsible for the loss.

It is partially because of the obligations and partially because of the liability that an executor assumes that she is compensated for her role as executor. The compensation is a percentage of the estate. The executor receives 5% of the first $200,000 of the estate, 3.5% of anything above $200,000 up to $1,000,000, and 2% of anything above $1,000,000. The executor also receives 6% of any income that estate earns, such as interest and dividend income.

One question that frequently comes up is, How much does an executor need to communicate with the beneficiaries of the estate? I think most beneficiaries believe how much the executor needs to communicate is far more than how much the executor actually needs to communicate.

In my practice, whether drafting a last will and testament, a financial power of attorney, or an advanced health care directive, I have always followed the same philosophy that too many cooks spoil the soup. I do not believe in co-executors, co-power of attorney agents, or co-health care representatives. I believe that there needs to be one chief and the rest of the people are Indians.

The law seems to be in sync with my thoughts on the matter, because the law obligates the executor to speak with beneficiaries very infrequently.

After the Will is submitted to probate, the executor must provide a copy of the Will to the beneficiaries and notice that the Will has been submitted to probate. The next required communication from the executor to the beneficiaries would not come until one year after the executor was officially appointed. At that time, the executor must provide an accounting to the beneficiaries.

Now, an executor may choose to communicate more frequently with the beneficiaries. With a family that gets along well, I’m sure that there is frequent communication and all of the beneficiaries are aware of the happenings with the estate.

But not all estates involve happy family members who get along or people who are family members at all, and the ability of the executor to refrain from communicating with the beneficiaries as to every move she makes can be very helpful.

This is not to say that the executor might not want to communicate with the beneficiaries on certain issues. She is, after all, ultimately liable for her actions, but the option to refrain from communicating preserves her position as chief.

Communication ultimately leads to suggested courses of action or demands as to a certain courses of action, but it is the executor, and only the executor, who is responsible for the actual results. Tough jobs often appear simple from the cheap seats in which a person has no true responsibility or liability, and it is best if the executor always remembers who wears the true mantle of responsibility.


The United States Court of Appeal for the Third Circuit recently decided a case involving a Medicaid estate recovery issue. Medicaid is a health insurance program for needy individuals. Unlike most health insurance programs, Medicaid will pay for the cost of long-term care, such as care in a nursing home or assisted living residence.

In order to qualify for Medicaid, an individual must have income that is insufficient to pay for the cost of his care and a very limited amount of assets. Because Medicaid only pays benefits to people who have few assets, most Medicaid beneficiaries die owning very few assets; however, if a Medicaid beneficiary does die owning assets, Medicaid seeks to recoup any benefits that it paid during that person’s life by placing a lien on the former Medicaid beneficiary’s estate. This is known as Medicaid estate recovery.

Because a home is an exempt asset for purposes of determining Medicaid eligibility, the most common asset of any significant value that a Medicaid beneficiary might die owning is a home. After the Medicaid beneficiary dies, Medicaid will place a lien on the beneficiary’s home, and when the home sells, Medicaid will be repaid.

Part of the Medicaid Act addresses Medicaid estate recovery, and essentially, what that section of the Act says is, Medicaid cannot seek recovery for correctly paid benefits until after the Medicaid beneficiary dies. This is why it is called “estate recovery,” because the government can only seek to recovery benefits from the estate of the beneficiary.

With that said, there is another provision of the Medicaid Act that essentially says, each and every beneficiary of Medicaid benefits assigns to the state his right of recovery from third-party parties for any medical losses that he incurs. For instance, assume that Mr. Smith gets into an automobile accident. The accident is serious, and Mr. Smith, who was a self-supporting individual prior to the accident, is now totally disabled and incurs hundreds of thousands of dollars in medical expenses that he has no means to pay. Mr. Smith qualifies for Medicaid benefits, and Medicaid pays for Mr. Smith medical care and nursing home bills.

Mr. Smith sues the person who caused the accident and wins an award of damages. The assignment provision of the Medicaid Act says that to the extent this award of damages constitutes reimbursement for medical expenses; Medicaid has a right to recoup those damages from the award.

A few years ago, the United States Supreme Court decided a case that held a state is limited to recovering only against that portion of the award that constitutes compensation for medical expenses. For instance, if Mr. Smith’s damage award included compensation for his pain and suffering or for his lost wages, then the State cannot seek reimbursement from those portions of the award.

The recent Third Circuit case sought to answer a question that the Supreme Court did not answer, If a State is prohibited from seeking recovery during a beneficiary’s life and can only seek recovery from the estate of the beneficiary, how can the State seek reimbursement from an award of damages during the beneficiary’s life? These are two separate provisions of the Medicaid Act, and those two provisions appear to be in conflict.

As the Third Circuit noted, it would be quite odd to find that a Medicaid beneficiary can have his medical expenses paid by Medicaid, yet also sue a third-party for his damages and recoup medical expenses form that third-party for medical expenses he never paid. The court held that the recovery provisions were designed to prevent a Medicaid beneficiary from paying for his medical costs with exempt assets, while the assignment provision was designed to ensure that a State was repaid when a third-party was held liable for the medical expenses.

I agree with the court’s decision. A person should not be permitted to sue and recover an award for medical expenses that he never paid.