Many families reach a point when a loved one requires part-time or full-time care due to health issues or aging. In families with multiple children, caring for an aging or ill parent often falls on one sibling more than the rest.
Caregiving in any capacity can take a financial toll, known as the “caregiver penalty.” Research from the Employee Benefit Research Institute finds that caregivers are likely to have fewer financial assets than non-caregivers, and more debt. This isn’t shocking, since caregivers typically have to sacrifice career growth and associated wages.
Typical estate plans compound the problem, since many parents split their assets equally among their children even when one child stepped up to provide care more than the others. This inevitably penalizes the caregiver, even if unintentionally. But there are ways around that.
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Here’s how parents can make things right when one child sacrifices their own financial well-being to provide care.
Create a caregiver contract
Some parents choose to reward their children for providing care through an inheritance. But that’s not the only avenue to explore.
“If parents want to pay for their child to care for them, they can create a caregiver contract that outlines the caretaker duties, how much they will be compensated, and mileage for driving parents,” says Kelsey Simasko, attorney at Simasko Law. That agreement can have a specific equity clause designed to compensate the caregiver using property, home equity, or other assets.
As Simasko explains, a caregiver contract can be worded to make it clear that the payments are not a gift, but for services rendered. This allows a grown child who may be working less and therefore earning less to receive compensation immediately, thereby reducing near-term financial stress.
Of course, Simasko recognizes that not all parents have the funds to begin paying their child for caregiving services.
“If this is not the case, then providing their compensation as inheritance may be a better option,” she says.
But if you do decide to pay a child for caregiving services, you should have an elder law attorney create a contract for you so you can be sure it complies with Medicaid rules, Simasko insists.
It doesn’t matter what option one chooses. What matters is how it looks to others.
Misty Ralston, owner and attorney at Ralston Law, says a caregiving contract should spell out the caregiving duties and associated compensation. She also says such a contract should ideally be in place before services are rendered, and that the caregiver should maintain a log of the hours they work.
“Otherwise,” she warns, “those payments will be treated as a gift or uncompensated transfer for Medicaid or might be considered as something coerced upon the parent as an afterthought rather than a true contract for services.”
Keep in mind that Medicaid uses a five-year look-back period, so the transfer of certain assets may compromise eligibility.
Ralston also says that before drafting such a contract, it’s best to research what the average professional is being paid for these services. Also, she insists, “You want to make sure that the person signing has capacity to do so, and get a letter from the doctor stating the person’s capacity as well as the need for these services.”
And, Ralston says, “If the child doing the work is also the power of attorney, they should not sign for the parent. Allow the parent to sign themselves [and] have the parent meet with their own attorney.”
Before putting such a contract in place, Ralston recommends having a family meeting to discuss what is happening and why. All family members should sign a written acknowledgment confirming they understand the arrangement. Many families find discussing inheritance difficult, so we have tips to get you started in How to Talk to Your Adult Kids About Their Inheritance.
Finally, any family entering into a caregiver contract should consult a tax professional. The parents paying for care may owe a “nanny tax.” And the adult child receiving compensation may have to report it as taxable income.
Compensate the caregiver with a larger inheritance
In a caregiving situation, it’s often easier, logistically and financially, to give a caregiving child a larger share of an inheritance. Ralston says there are several ways to do this.
One option is to make a specific bequest that provides a preset sum to the caregiver as a thank you for stepping up during the parent’s time of need. That can sometimes be “easier to swallow,” she says, “than an extra percentage of the estate.”
Another option is to gift the home to the caregiving child. If they lived with the parent for two years prior to going into a nursing home for Medicaid, they may be entitled to use the Caregiver Child Exemption during estate recovery.
“Since the house might otherwise have to get sold to pay for the Medicaid ‘bill,’ why not give that to the child that has been caring for the parent and for the home all this time?” Ralston says.
Otherwise, a parent might choose to designate a certain account or life insurance policy to the child.
“It doesn’t matter what option one chooses,” Ralston says. “What matters is how it looks to others.”
Simasko agrees. While adjusting a will or trust to give a caregiving child a larger inheritance than their siblings is always an option, “this always carries the risk of the siblings fighting,” she says.
One approach Simasko recommends is having parents adjust each child’s inheritance from time to time to ensure it reflects the actual amount of care needed. The flipside, though, is that amending a trust costs money, so adjusting beneficiary designations could get expensive, even if it’s only done once a year.
No matter which option you choose, the key is to have open conversations at the family level before one sibling starts providing consistent care. That way, everyone is on the same page, and there are fewer surprises, conflicts or ill feelings.