Something new for me regarding Medicaid

[NECPA in NEBRASKA]

A client called me because he is working on his father's estate. His attorney got on the phone and told me that my client is going to receive quite a bit of money to manage his father's wife's care so she qualifies for aid. They are writing up a personal service contract. I have never seen this before, but then I don't do estate work. It sounds like this will end up on Schedule C with no deductions. The attorney mentioned deferred comp plan. Has anyone run across this before?

 

Thanks!

 

[rfassett]

Clarify a couple of things if you could.  The attorney said that your client is going to receive a lot of money to manage the wife's care so she qualifies for aid?  If she not well and needing care now?  Or is this a plan to spend down the estate so that she WILL qualify for aid (when the time comes)?  The personal service contract makes sense if she is not well, but what is the purpose if she is well.  My understanding is that the spend down only works if the care that she is getting at home is just a substitute for the care that she would get in a nursing home.  In other words, but for the care that she is receiving now, she would be in a nursing home.  Not sure about the Schedule C - I would have to research that.  If it is Schedule C, then I guess you could fund a retirement plan with most of it.  That may be what the attorney is referring to.

 

Anyway, those are just some things that pop into mind right now. 

[Jack from Ohio]

Clarify a couple of things if you could.  The attorney said that your client is going to receive a lot of money to manage the wife's care so she qualifies for aid?  If she not well and needing care now?  Or is this a plan to spend down the estate so that she WILL qualify for aid (when the time comes)?  The personal service contract makes sense if she is not well, but what is the purpose if she is well.  My understanding is that the spend down only works if the care that she is getting at home is just a substitute for the care that she would get in a nursing home.  In other words, but for the care that she is receiving now, she would be in a nursing home.  Not sure about the Schedule C - I would have to research that.  If it is Schedule C, then I guess you could fund a retirement plan with most of it.  That may be what the attorney is referring to.

 

Anyway, those are just some things that pop into mind right now. 

Don't forget the 5 year look-back period.

[BulldogTom]

Also, there is a new rule this year regarding In Home Health Services provided by a family member.  I just ran across it at my update seminar and I don't have all the details in front of me.  The way I understand it, those payments will not be made on a 1099 or W2 anymore from the counties.

 

I will post more when I get back to my tax office if any of you are interested.

 

Tom

Newark, CA

[rfassett]

Yes, Tom, please. I am interested.

[NECPA in NEBRASKA]

They are spending it down. It was a quick conversation, because the attorney was writing up the contract and just wanted to tell me that the client was getting the money. He commented to me that there isn't really anybody checking this stuff, so a lot of people don's even file the 1099 Misc. The woman is living at home and needs someone to come in a few days a week. I'm not an attorney, so I was not about to make any comments except that it would be subject to tax for my client. I don't know where they found this attorney, but he says it's common practice. My client can't perform the duties, because she lives out of state. He just has to pay her bills, I guess. 

[OldJack]

>> He commented to me that there isn't really anybody checking this stuff, so a lot of people don't even file the 1099 Misc.<<

 

Implying that you should not report it on the income tax return?  

[easytax]

Would this not be the same as running a business === money comes into your client for management duties; money goes out for payment of care to vendors, etc. Since your client is not a corp. (????) then your client should receive a 1099 and also issue proper forms as required to vendors.

 

Am I missing something?

[BulldogTom]

This does not seem right.  It smells to me.

 

Tom

Newark, CA

[BulldogTom]

Yes, Tom, please. I am interested.

This comes from my Spidell update seminar.

 

Notice 2014-7, the IRS says that In Home Supportive Service Payments (also known as Medicaid Waver Payments) made to a related individual are treated as qualified foster care payments excludable under IRC§131. 

 

The way I understand this, if an individual needs care that would require the state to pay for their care, and that care is provided by a relative who is compensated by the county for providing that care, the amount received by the relative is now excludable from income. 

 

Applying this to the OP, if the individual "spends down" their assets, and requires care that would be covered by Medicaid, and a relative provides that care in home and is compensated under a Medicade Waiver Payment, the payments to the relative would be tax free.

 

Tom

Newark, CA

[NECPA in NEBRASKA]

Old Jack, the attorney may have been implying it, but I wouldn't fall for it anyway. I know about it now. Tom, the attorney is drawing up a personal service contract to give away her money to her step-son so that she will qualify for Medicaid. He will not be providing any care, but will be hiring an agency to come in. 

 

Easytax, I don't know how this is really structured. It was less than five minutes to tell me that my client was going to get this money and maybe would need to do some deferred comp plan. It may be that he can deduct what is being paid out, but I will wait until it happens and see what this contract says. I have a lot of clients that have had parents need to spend down, but this is something that I have never seen. 

[rfassett]

This comes from my Spidell update seminar.

 

Notice 2014-7, the IRS says that In Home Supportive Service Payments (also known as Medicaid Waver Payments) made to a related individual are treated as qualified foster care payments excludable under IRC§131. 

 

The way I understand this, if an individual needs care that would require the state to pay for their care, and that care is provided by a relative who is compensated by the county for providing that care, the amount received by the relative is now excludable from income. 

 

Applying this to the OP, if the individual "spends down" their assets, and requires care that would be covered by Medicaid, and a relative provides that care in home and is compensated under a Medicade Waiver Payment, the payments to the relative would be tax free.

 

Tom

Newark, CA

Thanks Tom! That's good information to know.

[JohnH]

This may not be exactly relative to your situation, but I'll post it anyhow. I once had a client who was selling his business to another company. The lawyer kept telling me it was a non-taxable event because of the way he had it structured. I kept telling him there was no way, but invited him to give me any tax-specific cites he could provide. He sent me a quirkly little article written by another lawyer, but it just tap danced around the tax implications.

I finally asked him if he would be interested in preparing the return, which of course he was not. But he kept insisting that this was commonly done, and he knew lots of CPA's & tax preparers who were following his advice. TRAP SPRUNG ! I asked him to provide my client with the names of 2 or 3 tax pros so the client could retain one of them to prepare the return. I told the client I would not follow the attorney's advice and that he should be giving the client a referral. Last I heard, the attorney never followed through and I think the client self-prepared his own return. (I think 7 years have passed, so the fact is he probably got away with it. But in any case it wasn't my problem.)

Edited January 24, 2015 by JohnH

[Randall]

JohnH, that's the way I would handle it too.  Just send them somewhere else.

 

As for BulldogTom's reference, the original situation doesn't seem to apply but I'm not sure I understand the whole situation.  The attorney's reference that it's done all the time seems questionable.

[NECPA in NEBRASKA]

I will have to wait and see what my client shows up with. I will not do any work for either the estate or the spouse's taxes. My client will be reporting the income as long as I am doing the return.

[Terry D EA]

You are getting some very good advice here. I do question the attorney's statement and would probably offer up another preparer if something doesn't pass the smell test.

[easytax]

A client called me because he is working on his father's estate. His attorney got on the phone and told me that my client is going to receive quite a bit of money to manage his father's wife's care so she qualifies for aid. They are writing up a personal service contract. I have never seen this before, but then I don't do estate work. It sounds like this will end up on Schedule C with no deductions. The attorney mentioned deferred comp plan. Has anyone run across this before?

 

Thanks!

 

 

Also, there is a new rule this year regarding In Home Health Services provided by a family member.  I just ran across it at my update seminar and I don't have all the details in front of me.  The way I understand it, those payments will not be made on a 1099 or W2 anymore from the counties.

 

I will post more when I get back to my tax office if any of you are interested.

 

Tom

Newark, CA

 

Here is a reference that states basically --- if caregiver is not in business, and a family member, etc. then NO self-employment tax but still compensation must be reported:   http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Family-Caregivers-and-Self-Employment-Tax . If doing it as a business, it is a business and all taxes are due.

 

The reference Tom makes is I believe to a Medicaid reimbursement for care givers and can be referenced here:  http://www.irs.gov/irb/2014-4_IRB/ar06.html .

 

Please note that the original post (I believe) references that the receipentent would NOT be doing the care but would just be managing, etc. so (not being an attorney - my disclosure) my personal opinion is that the "attorney" was "blowing smoke" and a 1099 would be the proper way to go.

[kcjenkins]

Easy makes a great point, IMHO.  If the recipient is not a 'caregiver', but just being paid to manage finances, etc, then the special rule for family caregivers is not applicable anyway.  The argument might still be made that he's not "in the business" so SE tax not applicable, but that would be a 'facts and circumstances'  issue.  How much he's being paid, and amount of time involved would be important factors.  

[NECPA in NEBRASKA]

If he gets all of this money at one time for "personal services", I would say that it will be hard to not call it subject to self-employment tax. When I see this contract, I will talk it over with the client. Most people around here just spend down the money to qualify for Medicaid.