Personal Service Contracts in Long-Term Care Planning

Personal Service Contracts in Long-Term Care Planning

By Donald D. Vanarelli, Esq.


When considering the concept of long-term care planning, one strategy to be considered is the use of the personal services contract (“PSC”) (also referred to as a family care agreement, a life care contract, or a personal care agreement). In many cases, an elder would have no choice but to move to a long-term care facility, were it not for the care provided at home by a family member. However, a family member’s decision to provide care to an aging loved one comes at great personal and financial sacrifice. The family member may choose to alter his or her employment schedule or career path, or even give up a full-time job, in order to accommodate the increasing needs of the elder. A PSC may be used in such situations, to compensate the loved one for the valuable care provided to the elder. Compensation through a PSC may also constitute a legitimate “spend-down” of an elder’s funds, for purposes of qualifying for public benefits based on financial need, such as Medicaid or VA Pension benefits.

Medicaid and Long-Term Care Planning

In the Medicaid context, when a family member provides care to a loved one without entering into a valid PSC, that care is generally presumed to be done for “love and affection”; in other words, for free. Thus, unless the care agreement is valid, formal and reduced to writing, payments made by the elder to the caregiver are considered to be gifts. Medicaid will impose a penalty for such transfers. A PSC is an agreement by which the caregiver can be compensated for the services he or she renders, while allowing the elder to transfer wealth to the loved one without jeopardizing (and, in fact, accelerating) the elder’s eligibility for public benefits. In a 2010 national survey of elder law attorneys by, more than 80% of those responding reported that PSCs are being accepted by Medicaid as legitimate long-term care planning vehicles in their states.

VA Benefits and Long-Term Care Planning

Under the VA program, in order to qualify for the VA pension, a veteran must have countable income below an annual income limit. However, “unreimbursed medical expenses” can bring a veteran’s countable income below this limit, thereby qualifying the veteran for pension benefits. If the veteran is in need of aid and attendance or is housebound, according to the primary physician, then a PSC may be entered into between the veteran and a family member, for assistance with such things as activities of daily living and management of medical care or medications, and payments under the PSC will qualify as “unreimbursed medical expenses.”

Use of Personal Services Contracts (PSCs)

However, care must be taken in drafting and carrying out the terms of a PSC, to avoid jeopardizing public benefits. For example, under the Medicaid program, if a PSC provides that the caregiver be pre-paid for care to be provided in the future, the PSC will be considered invalid, and the prepayment will be considered an uncompensated transfer (a gift) that will be subject to a Medicaid penalty. The hourly rate of compensation under the PSC must be reasonable, based upon the types of services rendered and the prevailing rate for those services in the geographic area where services are being provided. The contract must be assignable and transferable, or Medicaid will consider the PSC as having no intrinsic market value (and therefore, payments made under the contract will be considered uncompensated transfers that will be subject to a Medicaid penalty period). If the elder is a resident of a long-term care facility, it is important to ensure that the services to be provided under the agreement not duplicate those services already being rendered by the nursing facility. The caregiver should be able to prove, through time slips or other records, that the services under the contract were actually delivered to the elder. In addition, the caregiver should report the payments received under the PSC as income, for tax purposes.

Family caregivers provide a valuable service to their elder loved ones, often at great person and/or professional expense. These caregivers are entitled to be compensated for those services. Families considering this caregiving arrangement as a part of their long-term care planning should consider entering into a valid PSC, in order to compensate the caregiver while protecting or even accelerating the elder’s eligibility for public benefits.

For additional information regarding Long-Term Care Planning Planning Issues, call us at 908-232-7400 or click here to contact us online. End of article icon.


Donald D. Vanarelli, Esq., with offices in Westfield NJ, is a Certified Elder Law Attorney (by NAELA, accredited by the ABA), an Accredited Professional Mediator and an Accredited VA Attorney. Mr. Vanarelli was selected as a “Super Lawyer” in years 2007–2011 and is a founding member of the New Jersey Elder Mediation Center. Specialized practice areas include: probate lawestate planningestate administrationestate litigationguardianships, and special needs trusts.


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