21 Jan Will being paid as power of attorney hurt a Medicaid application?

Q. I’m writing to ask about how to handle fees I’ll be receiving as compensation for acting as power of attorney for my father. I’ve been his durable power of attorney for years now, handling his bills and affairs as he ages. He now suffers from dementia and I had to sell his home and move him to an assisted living facility with memory care. We’ve had a power of attorney compensation agreement but I never used it. It stipulates an hourly rate of $40, or 2% of the estate’s value, whichever is higher, as annual compensation. The compensation I’m receiving is approximately $8,000. In about 18 months, he will run out of money, and will be applying for Medicaid to cover the continued cost of his care, and I’m concerned about making sure that the compensation I receive as power of attorney isn’t viewed as a “gift” during his look back period. Should I claim the $8,000 as income on my tax return? Should I file any forms on his end to account for the payment? I’m not an “independent contractor” or am I acting as a professional, so I’m not sure a 1099 NEC or 1099 MISC would apply. I am committing a lot of hours to managing my dad’s finances, so compensation is certainly justified, especially since we had an existing agreement. I just want to make sure he isn’t penalized for it later down the road.
— Daughter and POA

A. We’re glad to hear you’re making sure your dad gets the care he needs.

And you’re right. It is very expensive.

Let’s cover the basics.

In order to qualify for Medicaid, an individual must meet an income and asset threshold, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.

Assets may not exceed $2,000, she said, noting that certain assets do not count.

“Medicaid has a five-year look back period to prevent potential applicants from gifting their assets to others in order to meet the asset eligibility test,” Romania said. “Any transfers or expenditures during that look back period will be analyzed.”

Payments to a family member that are not supported by a written agreement and substantiated by the surrounding facts will probably be deemed a gift, and therefore may result in a penalty period in which Medicaid assistance is denied, she said.

“In order for payments to a family member not to be deemed a gift, or part payment and part gift, the payments need to be reasonable based upon the work performed,” she said. “Thus, even though the principal of a power of attorney, in the document or a separate fee agreement, may set compensation or the method of calculating compensation, Medicaid may find that the compensation set is excessive and likely meant to deplete assets.”

Medicaid will reclassify some or all of an excessive payment as a gift, she said.

“Such a classification is more likely if the payment is not based on hours or tasks but is a predetermined lump sum — for example a fixed amount or percentage of the estate regardless of the hours of work performed,” she said.

In order to avoid such a finding, it is important to detail all tasks performed in a diary or daily log, including the dates and time expended, Romania said.

“If the payment is truly for services, and not a gift, it is also important that any payments received by the agent/caregiver be reported as income on his/her income tax return and tax paid on such income, if due, regardless of reporting by the payor,” she said. “Reporting by the payor would differ depending on classifying the agent as an employee or independent contractor.”

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This story was originally published in January 2025. 

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