"Personal service contracts” in the Medicaid planning context are agreements that enable a person needing care to secure the services of a caregiver. If formulated correctly, many States allow them to be used in a way that effectively enables a senior family member to transfer assets to a child or grandchild, thereby reducing the senior family member’s “countable assets” for Medicaid qualification purposes.
The assets transferred to the caregiver are income, and they are therefore subject to all applicable taxes at the Federal, State, and local levels. By their nature, personal service contracts do not typically create an employer-employee relationship between the senior family member and the caregiver. Since the senior family member is not typically paying employment taxes, the burden of paying self employment taxes normally falls on the caregiver. If the senior family member transfers non-cash assets pursuant to the personal service contract, the caregiver must nevertheless recognize the value of the assets as income. Thus, the caregiver must come up with the cash to pay the applicable taxes out of his or her own pocket.
This highlights the complexity of Medicaid planning in general and using personal service contracts in particular. It is important to remember that many Medicaid planning strategies have income or transfer tax consequences, and those tax consequences may outweigh the benefits of a particular strategy. It is also important to remember that different States view different Medicaid planning strategies differently, so before you embark on a personal service contract or any other strategy, you should secure the advice of a Medicaid expert in your area. Check out http://www.eldercarematters.com/statechapters.htm for a State by State listing of professionals who can help you. You can also find Hawaii-specific information at www.est8planning.com.