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Financing a Family Caregiver Agreement with Home Equity — Part 2 – Keystone Elder Law

Last week’s article gave an overview of options for how a frail, aging person might arrange to remain in their home environment with a creative family caregiving arrangement.   Sometimes live-in family caregivers, long-term care insurance, or home care services through the County Office of Aging can be resources.  But for middle-class persons who do not have long-term care insurance, and whose family members are nearby but are unable to be live-in caregivers, the option of using home equity to fund a caregiving plan can be a worthy consideration.

The best place to start is to have a written Care Plan prepared by a qualified professional who is unrelated to the family. The Care Plan should make observations of the living environment and  recommend any changes needed for safety or convenience.  The needs for the individual’s care should be evaluated with respect to the six Activities of Daily Living (ADLs), as well as incidental activities.

We have previously written in detail about Care Plans and ADLs. Keystone Elder Law’s Care Coordinator, Karen Kaslow RN, can prepare a Care Plan.

The Care Plan should be incorporated with a written Family Caregiving Agreement between the person who is receiving care and the family members who provide it. While it might seem absurd to have a contract among family members, the documentation of why money is being transferred from the older person to the family members is useful.  We have previously written about Medicaid’s five year look-back, gifting penalties and filial responsibility.  A  Family Caregiver Agreement provides insurance against those potential issues becoming financial liabilities for the children.

Suppose that Grandma or Grandpa has a monthly income of $2,300, a home with a market value of $175,000, and few other resources.  The older person is becoming frail, but resists moving from his or her home, and wants to pass it on to the children.  There is not enough money to hire outsiders to provide care.

The children own their homes and have busy families. No child desires to move into the family home, either as a caregiver in the present, or in the future after Grandma or Grandpa has passed away.  The family is willing and able to invest time to help Grandma or Grandpa to stay in the family home.  Under these circumstances, it could be possible for family caregivers to earn their future inheritance, rather than to lose it to the cost of meeting their parent’s long-term care needs.

The tax assessment process provides a basis for a home’s market value. The “clean and green” values, which are permitted to discount the taxes assessed for some forested or agricultural land, should not be used as a basis for computing market value.  The market value equals the non-discounted assessed value, as adjusted by the Common Level Ratio that is published annually.

Assuming that the family caregivers come from more than one family unit, it will be necessary to take title of the home as tenants-in-common or in a family limited partnership where the fractional ownership in the property bears a relationship to the care which is provided. Cooperation can reduce complications. However, having a sound legal structure is important.

Medicaid law requires that the term of any promissory note may not be greater than the life expectancy of the payee. A reasonable interest rate must be charged.  Both the note and mortgage should have provisions to require that repayment of the note becomes due upon the death of the payee.  This ensures that both the creditors and the beneficiaries of the payee can receive what they are due from the probate of the payee’s estate in a timely manner.

Because repayment of the note could require the payor(s) of the note to get a conventional mortgage shortly following the death of the payee, it is important to consider if that will be realistic. A house that is in disrepair or is not owner-occupied will be more difficult to use as collateral.  If the one seeking the mortgage is not employed, getting a mortgage could be difficult.

The note can be reduced over time in relation to the value of the caregiving services. Such a reduction of the note principal would be instead of an exchange of cash in relation to the caregiving services.  Therefore, the amount that the note is paid down should be considered to be reportable for taxation as earned income.

In an ideal scenario, either the Family Caregiving Agreement will pay off the note balance in full, or Medicaid-subsidized long-term care outside the home will never be needed.   Otherwise, the note balance becomes a probatable asset, and “estate recovery” occurs, whereby the state will claim reimbursement for Medicaid funds used for the long-term care of the of the note’s payee. The state can collect on the unpaid note balance from the estate, but the family should not have any financial liability greater than the remaining note balance.

In the example of a $175,000 home, let’s assume that family caregivers would provide two hours of care every morning and evening for a frail parent. Assuming a rate of $20 per hour, and an interest rate of 3%, and a total of 4 hours of care every day, it would take 81 months of caregiving to pay off the note.   If the payee of the note would be 83 or younger, that 81 month term would be within the payee’s life expectancy.   If the Caregiving Agreement would be supplemented by the maximum-permitted gift of $500 per month, then the repayment term could be reduced to 66 months.

If a Care Plan says that more than four hours of care per day is needed, the note could be repaid quicker. However, if the older person would deteriorate to the point that facility care would be required, then the note balance could not be reduced by family caregiving services.  Instead, those who have the title to the house would continue to have an obligation to pay off the balance of the note term on a monthly basis.  In this example, that amount would be $2,400 per month, which would be part of the monthly payment that is due to the nursing home.

Creating such a plan to use home equity to pay for family caregiving is not right for everybody. But in a cooperative middle-class family, it can be workable.  Proper technical planning from the beginning is important since there is no legal technique to justify a retroactive family caregiver arrangement.

By Dave Nesbit, Attorney