Even if you’re not providing hands-on physical care for an aging parent, you’re still likely spending a ton of time in a project management role. You’re coordinating care, housing, professional services, finances… the list goes on and on.
Should you be paid?
If there is money to spare, then yes. However, HOW you should be paid is what I call a loaded question because there are a number of things to be considered. While it’s perfectly reasonable to be compensated a wage you *should* then report it as taxable income. In light of this, there may be better alternatives to be compensated. Be aware all options comes with caveats.
Pros to being paid an income now:
- This compensation is officially out of the parent’s estate which is helpful for future Medicaid application purposes.
- The money is officially in your pocket, which may be good for your cash flow and also ensures you’re compensated for your efforts.
- If you have no other income, you now have a qualified wage that allows you to contribute to a Roth or traditional IRA.
- If the parent’s estate is considered high-net worth, you’re officially reducing the estate which could ultimately bring it under certain taxable thresholds at their passing (ie – MA estate tax is triggered at a $1M net worth).
- You should report this as taxable income, which may push you into a higher marginal bracket.
- If the parent only has retirement accounts to draw from, every dollar taken from these accounts are taxable to the parent’s marginal bracket and could increase their Medicare premium. Ouch!
- If the parent has significant capital gains within their accounts, liquidating funds to create compensation might cause a capital gains tax which otherwise would receive a step-up in basis if they were left for inheritance.
Increased inheritance: This is an excellent idea if a few details are addressed ahead of time. Please don’t assume compensation will simply sort itself out during the estate settlement process, especially if you have siblings. First, you must be sure there WILL be an inheritance remaining after paying for care. Second, make sure your beefed up inheritance is carved out via beneficiary designations or documented within your parent’s estate planning documents. A common issue is assuming the caregiver child gets the parent’s house in addition to an equal share of remaining accounts. When the estate plans make no mention of this it’s a recipe for disaster.
Gifting: Instead of receiving a wage your parent could “gift” you an amount as compensation. What’s known as the “annual exclusion amount” means any individual can gift another individual up to $15k/year in 2020 and it’s not reportable to the IRS. Therefore, if your compensation falls under this amount, making a gift is extremely easy to arrange. If compensation is more, potentially each parent makes you a gift or you have them make gifts to your spouse/child/etc in order to get to the desired amount. However, if you need to apply for Medicaid within 5 years of a gift you’ll run into issues. If you’re thinking a much higher compensation, your parent can gift at a higher amount but would need to officially report it by filing a gift tax return. This is more of a nuisance than anything else and the gifted amount will ultimately be factored back into their MA estate tax (although the gifts themselves will not be taxed).
How much should I receive?
In terms of an amount for compensation, that’s very personal and open. You want to try and come up with something that feels fair to everyone involved. In terms of how to calculate an amount, you could do an hourly rate, project rate, or bill a percentage on the net worth you’re overseeing. I would argue that your compensation should be relative to the role, time spent, and your experience within it. It shouldn’t necessarily be tied to other employment or unrelated skill sets. For example, let’s say you’re an environmental engineer earning $250k/year and you’ve temporarily stepped aside to help your parents age-in-place. It doesn’t necessarily make sense to expect a $250k annual compensation from them to make you whole. In any circumstance, whatever you arrange should be documented with a personal care agreement.
At the end of the day it comes down to open communication and running the numbers so the family can brainstorm on inheritance goals, affordability of compensation/care, and tax strategy.