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Benefits of a care contract

Did you pay your children an allowance for completing certain chores around the house? Perhaps you paid a small sum in exchange for your son or daughter mowing the grass, mopping the floors or looking after a younger sibling. Or, on the other hand, maybe you viewed those chores as an essential part of your child learning responsibility and did not pay an allowance in return for those chores.

Do you now find yourself in a similar situation again? Do your adult children assist you with lawn care, snow removal, or errand-running? Most children would not dream of asking their elderly parents to pay them an allowance for the assistance they provide. However, in many circumstances I advise my clients to do just that–pay their adult children for helping them with various tasks.

One benefit of doing so is to maintain harmony among family members in the event one or more children bear most of the caretaking responsibilities. For example, Son mows the lawn each week during the summer, shovels snow during the winter, performs routine maintenance on the home, monitors Mom’s finances, and takes time off work to drive Mom to weekly medical appointments. Daughter lives out-of-state and is not involved in these day-to-day responsibilities. Mom passes away, leaving a very small inheritance equally for Son and Daughter. Son wonders if it was unfair for his sister to receive anything. While Son was more than happy to assist Mom, he reflects on the many hours it took away from his own family and job, while his sister did not make the same sacrifices.

A second reason for paying an adult child is to purposefully spend Mom’s funds paying Son for his assistance to use up funds that in the future would otherwise be used to pay the nursing home. Consider the same example above, except Mom moves into the nursing home and spends her remaining funds on her care. Mom qualifies for Medicaid five months before her passing and has nothing left to leave to her two children. Son is discouraged that Mom’s funds were exhausted by the nursing home bill, considering he spent so many nights and weekends over the past few years caring for Mom in her home to delay her move into the nursing home in the first place.

In both these scenarios, the family would have benefitted from a written Care Contract between Mom and Son in which Mom agreed to pay Son for his work on her behalf. I always recommend my clients follow the rules of the North Dakota Department of Human Services for what qualifies as a valid Care Contract. That way any payments made from Mom to Son will not penalize Mom if she needs to qualify for Medicaid in the future to help pay nursing home costs.

A Care Contract should be in writing and signed by both parties. Although the DHS rules were relaxed recently to not strictly require a written contract, having one in place is always the best practice. Additionally, if Mom is no longer able to sign legal documents, the rules allow her financial agent or trustee (also known as a fiduciary) to sign the Contract, so long as the fiduciary is not the same person who is also providing services to Mom. If that is the case, the Care Contract is only acceptable if Mom signed it while she still had capacity to sign legal documents. The care provider’s compensation should be consistent with fair market rates for the types of tasks completed, and payment should be made to the care provider promptly. The income received by the care provider must be reported on an IRS Form 1099 and is subject to tax. There are many caveats and special rules that may apply to your situation. As always, follow the specific advice given to you by your attorney and tax advisor.

Although you may think your children have outgrown receiving an “allowance” from you, such an arrangement may be exactly what’s needed to protect your hard-earned assets and preserve family harmony.

This article does not constitute legal advice. Each individual should consult his or her own attorney.

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