Question: Last week, we began our answer to the daughter of parents in their 80s (the father had Parkinson’s Disease, and the mother was worn out caring for him), who wanted to know what we thought about personal care contracts. These are agreements between an elderly person and one or more individuals who, in return for a lump sum payment, promise to deliver enumerated services to the elderly person for the rest of the senior’s life.

As noted last week, there are downsides to both the elderly person – for example, the caregiver could take the money and fail to perform the services – and the caregiver, who will be assessed significant income taxes because the payment is for services.

Probably the greatest benefit to the elderly person is the potential that, with a higher level of privately paid care, the senior’s chances of being able to remain at home for longer periods of time improve. And the longer the senior can remain outside the nursing home, the better. But if circumstances require that the senior enter a facility, the caregiver should be able to provide personalized care on a regular basis that may well improve the resident’s quality of life.

We believe these contracts should be entered into only with significant study, and only if all the risks are understood. Personal care contracts should be prepared by experienced attorneys and should include provisions calling for specific services to be made available on an “as needed” basis. These services can include, but are certainly not limited to, (1) supervising the senior’s state of health and safety, which includes dealing with the health providers; (2) providing for the senior’s physical, social, and related maintenance; (3) assuring that necessary equipment is purchased, operable, and repaired when necessary; (4) planning for and providing socialization with others whom the senior enjoys; (5) arranging for or cooking meals; and even (6) paying bills based on the trust relationship between senior and care provider.

Because these types of contracts are far-reaching and important, a trust relationship must exist, and there should be as many safety precautions built into the contract as possible due to the likelihood of potential financial or other harm to the senior where, in return for a promise to provide care for the rest of the senior’s life, the senior is contributing a rather significant amount of money that may all be lost.

Using governmental life expectancy tables based on the age of the contracting senior, knowledgeable attorneys and certified public accountants can compute the fair market value of the services to be provided over the senior’s lifetime in order to arrive at the amount the senior will pay. Properly prepared, this contract should be considered to be a payment by the senior for the value of services, and, therefore, shouldn’t be considered a gift or gratuitous transfer for less than fair market value, which would cause a period of disqualification for Medicaid purposes.

Taking the NextStep: Personal care contracts may be useful, but in our view, can be very dangerous to seniors, not only because of the risk of loss of assets, but also because of the tax consequences that may well crop up if the senior sells appreciated assets in order to pay the caregiver.