A personal services contract (“PSK”) can be an excellent tool to outline the services a caregiver is expected to provide, and compensate the individual accordingly. As long as the services are needed and reasonably valued, the PSK can be an excellent tool to facilitate a Florida Medicaid spend-down.
If the anticipated future care is valued at $200,000, we may ask ourselves “What is the best way to pay for those services?” If the caregiver is given a check as a lump-sum payment, without question the caregiver has dominion and control of the funds. The Internal Revenue Service will then take the position that the caregiver received taxable compensation when he or she received the check. Assuming the caregiver is single, under age 65, with a standard deduction and personal exemption and does not have any outside income, the federal income tax consequences as a result of the transaction are $46,831 in the year of receipt.
What if the caregiver cannot be trusted with the money in the form of a lump sum? Maybe the caregiver has a gambling problem, an abusive significant other, is a compulsive shopper, or is about to go through a divorce or declare bankruptcy. Rather than give him or her a check for the entire lump-sum, the care recipient can arrange for the caregiver to own an immediate annuity. The advantage of an immediate annuity is the lack of access to funds, other than the scheduled payments. For example, assume the funds were invested into a 10-year period certain immediate annuity with monthly payments that mirror the compensation outlined in the PSK – $1,667 per month. In one year’s time the caregiver would receive compensation of $20,004. Assuming the same filing status as noted above, the federal tax liability would be $1,054. To compare apples to apples, assume the federal tax rate does not change for the next 10 years, resulting in a total tax payment of $10,540. This is $36,291 less than taxing the entire amount in one year. What a significant difference!!
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Dale M. Krause, J.D., LL.M., has provided Medicaid Compliant Annuities to elder law attorneys, and their clients, throughout the United States. As a result of his practice, Mr. Krause has been labeled "The Pioneer of Medicaid Compliant Annuities."
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