My sister is caring for both my parents as my father is on Hospice and mother has Alzheimer's. As a family we agreed my dad's estate would pay a monthly "gift" amount so she could quit her career as an RN and give full attention to their care. She is not an employee of the estate nor does she receive "compensation" so that she does not have a heavy tax burden by the gift money. My brother is the POA and now says he is paying her as a medical professional and will be deducting the money he sends her as "medical expenses". I get that the deductions are beneficial to the estate but it would increase her taxes by 35% (according to her accountant) because she would have to set up an at-home care business because she could no longer claim that income as a gift from the estate. Does anyone have experience with this that can give some advice?
Gifting will cause problems with qualifying for Medicaid. This situation needs to be legal as it will cause everyone problems. Bro for breach of fiduciary duty, sis for not paying taxes, mom for not having sis as employee. This needs to be corrected.
The POA is responsible for handling the money in a responsible manner. If one parent has Alzheimer's, Medicaid is a possibility unless they have a LOT of money and/or LTC insurance. Making a gift that would disqualify them from Medicaid would be irresponsible. Note that the POA would have had to file a gift tax return for gifts more than 15,000 per person. Being a POA is a hard enough job without having to worry about how to arrange payments as gifts.
If the sister actually received the money as an inheritance from the estate, after they pass, she could avoid taxes. If the siblings are listed as equal heirs, and it is too late to change their estate planning, one or more sibling(s) may even be willing to disclaim their inheritance(s), then the remaining sibling(s) would share. The problem with waiting for an inheritance is that there may be no money left after they pay their LTC expenses. It can get ugly if the siblings don't disclaim as agreed.
I'd suggest looking at how much sister is being paid. If it isn't enough to cover taxes, it may not be fair in itself. A 35% marginal rate sounds high to me, maybe she is in a high income tax state, or it is pushing her own otherwise non-taxable SS income into taxable?
Consult with an elder law specialist and have your questions ready ahead of time.
Please also consider that at some point your RN sister may be overwhelmed by the intense care of 2 people and may need outside help, or your parents may be better off in a care facility. It is very expensive, even a private hire or agency person, depending on what level of medical attention they'll be providing. Can your parents afford $10K or more a month for EACH parent for an unknowable amount of time? Again, please get advice from a professional and do not crowdsource your answer...there are too many variables and not all people's input from this forum is accurate.
Your sisters accountant is correct, gifting is okay, but it can not be used as a medical expense write off on their taxes.
Can't have it both ways. She should be getting paid with taxes withheld and matched by your parents. I highly recommend using a payroll service that can do everything to keep this legal and offer your sister the added benefits of contributing to her SS, unemployment insurance and worker's compensation insurance in the event she gets injured on the job. As far as her tax bracket goes, she can be paid less if she is really concerned with that.
The reality is that she is an employee and she should not be receiving the compensation as a gift, it is already starting problems with the family. Yes, it will cost your parents more and she will have to pay taxes, but it will also keep everything legal and separate from inheritance, which could be a problem with what your brother is doing now, he could very well say she got part of her portion early. Can you imagine the problems with this if it went to court?
You really should consult with an Elder Care Attorney to determine what is the best way to protect your parents assets as well as your sister.
Yes the care your parents get would be included as Medical Expenses.
She would not necessarily have to set up a home business. A Caregiver Contract would probably all she would need.
I would also suggest that the contract be reviewed every 6 months so that her salary could increase if the needs of your parents increase to the point that it takes more of her time and as more help is required.