Should You Pay a Relative to Take Care of Your Parents?

Growing numbers of families are compensating relatives who serve as caregivers. According to a report by the National Alliance for Caregiving and AARP, 43.5 million Americans looked after a friend or relative age 50 or older in 2009, 28% more than in 2004. In a survey conducted for Home Instead Senior Care, a home-care franchiser, nearly 7% of respondents said they receive compensation for providing care to a relative.

Feeding this trend is the high unemployment rate, the costs of nursing-home care, and the 2006 changes in Medicaid law that affects asset protection strategies.

Some 37% of caregivers surveyed by the NAC in 2007 said they had quit a job or reduced their hours to accommodate their responsibilities.

There are several ways to compensate a family caregiver, an hourly wage, a lump-sum payment, or a larger inheritance. Consequently, each option is dependent the on  caregiver's desire for income now versus later, estate-planning goals,  tax consequences, and Medicaid law. Also, we urge our clients to disclose these caregiving arrangements to the whole family to avoid family conflicts or litigation.

Under federal law, when annual compensation exceeds $1,700, an employer and employee each owe federal payroll taxes of 6.2% for Social Security and 1.45% for Medicare. The employer must generally also pay 6.2% on the first $7,000 in wages in federal and state unemployment tax (For more information, see IRS Publication 926, "Household Employer's Tax Guide.")

If your loved one may eventually rely on Medicaid to pay the nursing home, it is important to draft a written "personal care contract"—that documents the caregiver's responsibilities and hours and sets a rate of pay in line with that of local service providers.