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In Florida, Personal Services Contracts ("PSK"), which are also referred to as Caregiver Agreements, are widely used as a spend-down tool for Medicaid and planning.

The PSK generally serves four purposes:

1. It reduces an applicant's countable resources to an acceptable level, which entitles the applicant to receive benefits;
2. It outlines the duties and obligations of the parties;
3. It establishes the compensation that will be paid to the caregiver; and
4. It dictates the duration of the annuity utilized within the planning, which is usually structured over the care recipient's lifetime.  The lifetime is determined by using the life expectancy tables published by the Chief Actuary of the Social Security Administration, found here.

Meet Carl Jones.

Carl Jones, a 77 year old Korean War veteran, is residing in an assisted living facility.  As a result of advanced Parkinson's disease, Carl has hand tremors, impaired posture and balance, rigid muscles, and slowed motion.  Carl needs daily assistance from his son, Tom, in order to properly bathe, dress, make doctor appointments, and manage medications.

Carl's Planning Goals.

In that Carl's care has become more extensive, Tom had to give up full-time employment in order to meet Carl's needs.  Carl now has three goals:

1. He wants to reasonably compensate Tom for his care.
2. In order to have sufficient funds in order to meet his expenses, Carl wants to become eligible for VA benefits.
3. In the event that he entered a Florida nursing home, he wants to be eligible for Florida Medicaid benefits.

Provisions of the PSK.

After consulting with a VA Planning Specialist, Tom's care was valued at $16.00 per hour.  When multiplied by the average number of hours worked each month - 60.66 (2 hours per day, times 7 days per week, times 52 weeks in a year, divided by 12 months), times Carl's Medicaid life expectancy of 109 months (a 77 year old male has a 9.15 year Florida Medicaid life expectancy), the total cost of Carl's personal services is $105,791.04.

Carl Purchases an Immediate Annuity.

In order to minimize federal income taxes to Tom, pay the compensation on a monthly basis, and not have to worry about whether he will have the funds in the future, Carl purchased an immediate annuity with a single premium cash payment of $101,119.  The immediate annuity reflected Carl as the "annuitant" and "primary beneficiary," and Tom as the "owner" and "payee."  In that the annuity is "owner driven," versus "annuitant driven," if Tom dies, and Carl survives him Carl gets the remaining scheduled payments.  In the alternative, if Carl predeceases Tom, and scheduled payments remain, Tom continues to receive them - at which point Tom may alter the primary beneficiary to designate his intended heirs.

Income Tax Consequences.

From the IRS' viewpoint, in that Tom never had dominion and control over the cash payment amount of $101,119, Tom only pays federal income taxes on the annuity payments that he receives in a given calendar year.  The reason for this relates to the fact that Carl and his insurance agent sent the annuity application, along with the payment, directly to the insurance company, and Tom never acquired any right to cancel the annuity contract for a full cash refund.

Advantages to Carl.

As a result of spending down the $101,119, and only having savings in the amount of $40,000, Carl became immediately eligible for a $1,644 monthly Veterans Aid & Attendance pension benefit.  Now, with total monthly income of $3,844 (social security and pension of $2,200 plus the VA benefit of $1,644), Carl does not have any problems paying his $3,500 monthly assisted living bill, along with his other monthly expenses, including prescriptions, cable television, cell phone, and haircuts.

Future Medicaid Benefits. Finally, Carl knows that if he ever had to enter a Florida nursing home for purposes of long-term care and needed to qualify for Medicaid benefits, he would have to spend down his $40,000 savings account to $2,000, and his PSK would not cause any eligibility problems.

Advantages of Using an Immediate Annuity with a PSK vs. Other Techniques.

• Pooled Trust Technique: Upon the death of the individual beneficiary, the trust must provide repayment to the Florida Department of Children and Families.
• Escrow Agent Technique:  The immediate annuity replaces the need for the escrow agent by maintaining the distribution of funds, thus avoiding unnecessary fees to the escrow agent.
• "Irrevocable Special Care Trust" Technique: The lump sum distribution to the trust is considered taxable income, and it is a well known fact that trust taxation is more harsh than individual taxation.