August 28, 2026
4:20 am

What Is a Personal Care Agreement?

A personal care agreement is a written, signed contract between an older adult and a family member or friend who provides care, setting out exactly what services will be performed, how many hours, at what hourly rate, and how payment will be documented. It is also called a caregiver contract, a personal services contract, or a family care agreement. Its purpose is to turn money that is already changing hands inside a family into a documented, arm’s-length transaction.

Almost every family that eventually needs one starts from the same set of wrong beliefs. They believe an informal arrangement is fine because everyone agrees. They believe writing it down would be insulting. They believe a handshake and a monthly check accomplish the same thing. And they believe the point of the document is to protect the caregiver.

Each of those is wrong in a specific and correctable way. This page works through them one at a time, because the corrections are what actually determine whether the agreement holds up when a Medicaid caseworker or a sibling looks at it two years later.

In This Article

Wrong Belief One: Paying a Family Member Is Just a Private Family Matter
Wrong Belief Two: We Can Write It Up Later If We Ever Need It
Wrong Belief Three: We Can Pay Whatever We Think Is Fair
Wrong Belief Four: This Is Free Money for the Caregiver
Wrong Belief Five: The Document Is There to Protect the Caregiver
Where Life Insurance Fits, and Where It Does Not
Frequently Asked Questions

Wrong Belief One: Paying a Family Member Is Just a Private Family Matter

It is, until someone applies for Medicaid. Then every dollar that left the applicant’s accounts in the preceding five years gets reviewed. The federal look-back period for asset transfers is 60 months, set by the Deficit Reduction Act of 2005, and it applies in every state, although a few states have shorter periods for some non-institutional programs. Confirm your state’s current rule with the state Medicaid agency.

Under that review, money paid to a daughter with no written contract is presumed to be a gift, not compensation. A gift is an uncompensated transfer, and uncompensated transfers create a penalty period during which Medicaid will not pay for nursing home care. The penalty is calculated by dividing the transferred amount by the state’s penalty divisor, and the clock does not even start until the applicant is otherwise eligible and receiving institutional care.

The math is unforgiving. If a family paid a daughter $2,000 a month for three years with no contract, that is $72,000 of presumed gifts. Divided by a state penalty divisor, that can be many months of ineligibility beginning at exactly the moment the family has run out of money. A written personal care agreement is what rebuts the gift presumption. See how the look-back period works and how these agreements interact with Medicaid before assuming your arrangement is safe.

Wrong Belief Two: We Can Write It Up Later If We Ever Need It

No. A personal care agreement has to be prospective. It must be signed before the services it pays for are performed, and payment must follow the agreement rather than precede it. An agreement drafted after the fact to cover three years of past payments is the clearest possible signal to a caseworker that the payments were gifts.

Prospective also means no lump sums for future care unless the state specifically permits them and the amount is calculated against a recognized life expectancy table. Several states flatly reject prepaid lifetime care contracts, treating the entire lump sum as a transfer. Others allow them with strict actuarial requirements. This is state-specific and is exactly the kind of question that belongs with an elder law attorney licensed where the applicant lives, not with a template downloaded from the internet.

Practically, the sequence is: draft, review with counsel, sign and date, begin services, log hours, pay by check or transfer on a regular schedule, and keep the records. Cash payments with no paper trail defeat the entire purpose even when a contract exists.

Wrong Belief Three: We Can Pay Whatever We Think Is Fair

The rate has to be reasonable for the local market for comparable services. Paying a son $80 an hour to drive to appointments will be treated as partly compensation and partly a gift. Paying $12 an hour in a market where home care agencies charge far more is fine from a Medicaid standpoint but may raise questions from other family members.

The usual benchmark is what a licensed home care agency charges in the same county for a home health aide or homemaker services, discounted for the fact that a family caregiver carries no agency overhead. National cost-of-care surveys published annually by long-term care insurers put non-medical home care in the mid-$30 per hour range nationally as of the 2025 survey year, with wide state variation. Get two current written quotes from local agencies and keep them in the file as the basis for your rate. That documentation is worth more than the number itself.

Write the rate, the services and the expected hours into the agreement with specificity. “Assistance as needed” is not a service description. “Meal preparation, bathing assistance, medication reminders, transportation to medical appointments, and laundry, approximately 20 hours per week” is.

Element	What it must say	Why it matters
Effective date	Signed before services begin	A retroactive agreement reads as a gift
Services	Specific tasks, not “as needed”	Vague duties cannot be valued by a caseworker
Hours	Expected weekly hours, with a log	Timesheets are the proof of performance
Rate	Local market rate, documented with agency quotes	Above-market pay is treated as a partial gift
Payment method	Check or transfer on a set schedule	Cash leaves no trail and defeats the document
Tax handling	W-2 or 1099 decision, made in advance	Unreported pay creates a second problem

Wrong Belief Three: We Can Pay Whatever We Think Is Fair

Wrong Belief Four: This Is Free Money for the Caregiver

It is taxable income. Payments under a personal care agreement are compensation for services, and the caregiver owes income tax on them. Whether the caregiver is an employee or an independent contractor depends on the facts, and the answer determines who owes payroll taxes.

If the care recipient controls what work is done and how, the caregiver is usually a household employee. IRS Publication 926, Household Employer’s Tax Guide, covers this. Once cash wages to one household employee cross the annual Social Security and Medicare wage threshold, which has been in the $2,700 to $2,800 range for recent tax years and is adjusted annually, the employer owes Social Security and Medicare taxes and must issue a Form W-2. Confirm the current year figure in Publication 926 or with your CPA, because it moves.

There is a real upside for the caregiver: reported earnings build Social Security credits. There is a real downside too: a caregiver who is themselves receiving SSI or a needs-based benefit can lose it. Run the numbers before starting, not after.

The care recipient may also be able to deduct qualified long-term care services as medical expenses if a licensed health care practitioner has certified chronic illness and the care is provided under a plan of care. That interacts with the per diem limits for certain benefits. Ask your CPA; do not assume.

Wrong Belief Five: The Document Is There to Protect the Caregiver

It protects the care recipient’s Medicaid eligibility first, the caregiver’s tax position second, and family peace third. The third one is underrated. A written agreement with logged hours is the single most effective way to prevent the sibling conversation that begins “Mom gave you how much?”

A complete agreement names the parties, the effective date, the services, the hours, the rate, the payment schedule, a termination clause, and a statement that services will be documented in a log. Both parties sign. Notarization is not required everywhere but is cheap insurance. Keep the signed original, the timesheets, the bank records showing each payment, and the agency rate quotes together in one file.

Two boundary notes. A personal care agreement is not a plan of care, which is the clinical document a facility or home health agency builds. It is not a durable power of attorney, which grants authority to act. And it is not the same as an agency service agreement with a licensed provider. If the person providing care is also the agent under a power of attorney, the agreement should be reviewed by counsel to avoid a self-dealing problem, since an agent paying themselves from the principal’s funds is a classic exploitation pattern even when it is entirely legitimate.

Also distinguish it from the caregiver child exemption, a narrow Medicaid rule that lets a home be transferred to an adult child who lived there and provided care that kept the parent out of a facility for at least two years. That is a separate rule with its own proof requirements. Read the caregiver child exemption and how to pay a family caregiver legally for the adjacent pieces.

Where Life Insurance Fits, and Where It Does Not

A personal care agreement is a spending document. It does not touch a life insurance policy, does not change ownership or beneficiaries, and no insurer is involved. The connection is money: the agreement creates a monthly obligation, and families need a source for it.

Households paying for care out of pocket typically draw on savings, a reverse mortgage, long-term care insurance benefits if the policy’s benefit triggers are met, or, where there is one, an unneeded life insurance policy. That last option deserves an honest treatment. Surrendering a permanent policy produces its cash surrender value. Reducing it to paid-up coverage keeps a smaller death benefit with no more premiums. Selling it in the secondary market can produce more than surrender for some older insureds in declining health. And for many families the right answer is to leave the policy alone entirely.

Leave it alone when the face amount is small and sits inside a burial exclusion, when a surviving spouse will need the death benefit, or when the insured is healthy and the offer would be low. If those do not apply and the premium is competing with the caregiver’s paycheck, it is reasonable to find out what the contract is worth. There is no cost to knowing, and a real number is more useful than a guess when you are budgeting against care costs with no long-term care insurance. Pine Lake Legacy does not purchase policies and does not give Medicaid, tax or legal advice; we provide education and a free policy review. Send the policy cover page or call (732) 978-9575, and take the number to your elder law attorney.

Frequently Asked Questions

Can we write the agreement to cover care already provided?

Generally no. A personal care agreement must be prospective, signed before the services it pays for, with payments following on a documented schedule. An agreement drafted afterward to justify past payments is the clearest signal to a Medicaid caseworker that those payments were gifts. Ask an elder law attorney whether your state allows any limited exception.

How do we decide the hourly rate?

Use the local market rate for comparable non-medical home care, documented with two current written quotes from licensed agencies in the same county. National cost-of-care surveys placed home care in the mid-$30 per hour range as of the 2025 survey year, with wide state variation. Keep the quotes in the file; the documentation matters as much as the number.

Does the caregiver have to pay taxes on the money?

Yes. It is compensation for services and is taxable income. If the care recipient controls how the work is done, the caregiver is usually a household employee, and once cash wages cross the annual Social Security and Medicare threshold the employer owes payroll taxes and must issue a Form W-2. Confirm the current figure in IRS Publication 926.

Is a lump sum for lifetime care allowed?

It depends entirely on the state. Some states permit a prepaid contract if the amount is calculated against a recognized life expectancy table; others treat the entire lump sum as an uncompensated transfer. Never structure a lump sum without an elder law attorney licensed in the state where the Medicaid application will be filed.

Is this the same as the caregiver child exemption?

No. The caregiver child exemption is a separate Medicaid rule permitting transfer of a home to an adult child who lived in it and provided care that kept the parent out of a facility for at least two years. A personal care agreement pays for services with money. They can coexist, but each has its own proof requirements.

Should we sell a life insurance policy to fund the agreement?

Sometimes, and often not. Leave the policy alone if the face amount is small and covered by a burial exclusion, if a surviving spouse will need the benefit, or if the insured is healthy and an offer would be low. If the premium is competing with the caregiver’s pay, a free valuation gives you a real number for your attorney to work with.

Find out what your policy is worth — free, confidential, no obligation.

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