Whenever a caregiver agreement is utilized in a Florida Medicaid or VA Planning case, there are always questions regarding income taxes. When, and to what extent, does the care recipient get to deduct the payment or payments? When, and to what extent, does the caregiver child have to recognize taxable compensation or income?
Section 61(a) of the Internal Revenue Code ("IRC") defines "gross income" as compensation for services... Thus, it is clear that when a caregiver child is paid on a monthly basis, with the actual compensation following the dates of service, the caregiver child will have to recognize taxable compensation to the extent of what he or she receives in a calendar year.
How do the income tax consequences change when the parent care recipient wants to pre-pay for all future services? We all know that the Florida Medicaid Program or VA Program allow an applicant to reduce his or her spend-down amount by a lump sum payment for future care services - accelerating an individual's opportunity to qualify for Florida Medicaid or VA benefits. But what if the caregiver child does not have a good history of managing money, and the parent care recipient wants to protect the compensation plan from advance spending by the caregiver child by utilizing an immediate annuity as part of the payment structure; does the immediate annuity provide the proper solution? It is my opinion that it does!
To illustrate, assume that Alice Green is age 77, and resides in an assisted living facility. Her daughter, Carol White, assists her twice a week by providing three hours of personal care needs per visit. The personal care needs include bathing assistance, laundry services, medication management, and transportation to doctor's appointments. Based on comparable services in the community, Carol's services are reasonably priced at $16.00 per hour. Over her Medicaid life expectancy, 10.96 years or 131.52 months, Alice expects to receive $54,496.00 worth of personal care services from her daughter, which equals $416.00 per month.
With Carol not having a good money management history, Alice was concerned that Carol would pre-spend the compensation if she received a $54,496.00 lump sum payment. After receiving some advice, Alice decides to purchase an immediate annuity for $49,250.00, which provides 131 guaranteed monthly payments of $416.00. Alice is the owner, annuitant, and payee of the annuity. After the caregiver agreement is executed, Alice transfers the ownership of the immediate annuity to Krause Financial Services, as escrow agent, pursuant to the terms of the caregiver agreement. For convenience purposes, Krause Financial Services would immediately change the monthly payee from Alice to Carol.
So what are the income tax ramifications of the aforementioned transaction? Does Carol have to recognize taxable income/compensation to the extent of the value of the immediate annuity? My answer is "no." Carol will only need to recognize taxable income/compensation to the extent that she receives payments in a given calendar year.
My opinion is supported by the cases of Sproull v. Commissioner, 16 T.C. 244 (1951), affd. 194 F.2d; Centre v. Commissioner, 55 T.C. 16 (1970); Minor v. United States, 772 F.2d 1472 (9th Cir. 1985); and Childs v. Commissioner, 103 T.C. 634 (1994). See IRC Section 83. Taken together, these cases stand for the proposition that the person who performs services shall not have to include in his or her gross income the fair market value of any property, until he or she has a beneficial interest in such property, to the extent that he or she can transfer the property without a substantial risk or forfeiture. In Carol's case, she has no beneficial interest in the immediate annuity, except to the extent that she receives actual monthly payments.
