Monday, August 6, 2012

The role of family gifts in providing elder care.

Most elder care is provided by families. Families use the same methods for providing care for elders that they use to provide care for any other family member in need. Whether it is a child with a disability, a brother with an addiction, or an elder with declining cognitive skills, families employ an informal system based upon gifts. Gifts, however, are not as simple as they might seem.

Family members whose earning ability is robust give to those who have less. The recipients may be young adults who are just getting started in life, middle age siblings who have failed to thrive economically, or elders who need help managing their later years. These exchanges can continue for a lifetime. I am sixty-one and, although I do not lack for much of anything, my parents still send me money.

The gift from children to elderly parents usually comes in the form of care. Our children take over the driving, the money management, and sometimes provide hands-on help with the activities of daily living. Within the family system the gift of care repays the gifts the elders have made to the children. This system of reciprocal gifts becomes an integral part of the way family members interact with and support each other. 

Care of family members by the informal exchange of gifts drives lawyers crazy. Only recently have I finally surrendered and accepted the fact that no matter what the law says this system of reciprocal giving will always be the primary way in which families manage care for each other.

In law school lawyers study gifts only briefly. We know that for a gift to be complete there must be intent to give and delivery of the property being given. The transaction is then complete. The recipient has full ownership of the property given, and the giver has no more claim on it. Gifts cannot have strings. If they do, they are not gifts. They may be contracts, or trusts or God knows what, but they are not gifts.

Gifts are not taxable to the recipient. If you receive money as a gift, it is not income. Thus, you pay no income tax on it. If you are very wealthy there may be a tax on the giver, but for anyone likely to die with less than five million dollars that is not an issue.

(If you are rich enough to pay taxes on the gifts you give, you can easily afford a good tax lawyer for individual advice. You should skip this article and hire one.)

The problem with the informal exchange of gifts for elder care is that the government hates it. Most people understand that you cannot give away all your money and then expect the government to pay for your long term care. People intuitively understand and agree with that concept even if they don't know the details of the rule.

(The rule in a nutshell is that large gifts made within five years of a Medicaid application will result in a penalty period in which the giver is disqualified from receiving long term care coverage.)

The Medicaid rule, designed to ward off the perceived threat of millionaires on Medicaid, fails to acknowledge the real life role of gifts in family dynamics. The hard work of elder care is a gift of services from the child to the parent, services that the elder would otherwise have to pay for. The gift of money to the child is reciprocal, an act of gratitude for the care given. Neither gift has formal strings attached, but one leads naturally to the other.

The other legal presumption that comes into play in elder care is the rule that care provided for a family member is a gift unless you can prove otherwise. You overcome that presumption by having a care contract—a written agreement in which the elder pays a family member for care. To be valid, the contract has to be signed before the care is given. I am forever encouraging elders and their family care givers to turn the informal exchange of gifts into a contract. With a contract money flows from the elder to the family care giver without the Medicaid penalty. Most families, however want nothing to do with my care contracts. No financial or legal advantage is significant enough to put a child through the humiliation of asking a parent to pay for family-provided care.

The system of informal giving is so important that few families will sign on to the lawyer-invented alternatives. This means at the time of a Medicaid application some elders will be punished for giving money to their children, and some children who might have received money for providing care will see that money go to care centers or the government.

I will continue to advise against joint bank accounts (a form of gift), joint ownership of real property (another form of gift) and outright gifts of money from elders to their children. I will offer care contracts to be signed by the elders and their children in the hope that the elder's money will flow in a structured way to family care providers rather than nursing homes or the government. A few families will take my advice, but most will not.

I don't blame the families who decline to accept my advice. They choose their family culture over legalism and who am I to blame them. The legal rules and presumptions were developed to stop the small percentage of people who used informal gifting to scam the system. The rules stop the cheaters and mildly annoy the vast majority. Families, I have learned, will put up with a significant amount of annoyance to keep the long established system of gifts in place, and when all is said and done few families are worse off because of it.

We lawyers see the exchange of gifts as a problem, and we offer solutions. Most families who come to me don't see the problem, and thus decline my solutions. I cannot say they are wrong, but I always want their decisions to be informed. 

I have more to say about gifts. In the system of reciprocal gifts I have described there is usually one or more family member keeping accounts of who did the giving and who did the receiving. Where accounts are kept there must come a day of reckoning. That day comes when the elder dies. In my next post, I talk about gifts and the administration of estates.