Paying Your Daughter for Care? Stop! Why Medicaid Calls It a 'Gift' and Denies Coverage

Paying Your Daughter for Care? Stop!

Your daughter quit her job to take care of you. To help her out, you write her a check for $2,000 a month. It seems fair, right?

Five years later, you need a nursing home. You apply for Medicaid to pay the $12,000 monthly bill. The caseworker looks at your bank statements and says: "Denied."

Why? Because in the eyes of the government, that money wasn't a salary. It was a gift. And you just triggered a massive penalty.

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The Medicaid "Look-Back" Trap

When you apply for long-term care Medicaid, the state looks at every financial transaction you made in the last 5 years (The Look-Back Period).

Unless there is a valid legal contract in place before the money changes hands, Medicaid presumes any money given to family is a gift, not compensation.

• Scenario: You paid your daughter $2,000/month for 5 years ($120,000 total).
• Medicaid's View: You gave away $120,000 to artificially qualify for benefits.
• The Penalty: They will refuse to pay for your nursing home for approximately 1 year (based on the average state divisor). You have to pay out of pocket, but you have no money left.

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The Solution: Personal Care Agreement

To turn those "gifts" into legitimate "compensation," you must sign a Personal Care Agreement (also called a Family Caregiver Contract).

This document must meet strict requirements to pass the Medicaid audit:

1. In Writing & Notarized: Handshake deals do not count. Getting it notarized provides proof of the date.
2. Signed in Advance: You cannot sign it today to cover payments made last year. No retroactivity allowed.
3. Market Rate: You cannot pay your daughter $100 an hour if a local agency charges $30. It must be a reasonable local rate.
4. Specific Duties: It must list exactly what she does (cooking, bathing, driving to doctors) and preferably be supported by a doctor's note stating this care is necessary.

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The "Tax" Catch (Crucial)

If it is a real job, it must be taxed like a real job. You cannot have it both ways.

This often makes the parent a "Household Employer" in the eyes of the IRS.

• The Daughter: Must report this income on her taxes.
• The Parent: May need to withhold Social Security/Medicare taxes and issue a W-2 if payments exceed the annual threshold (approx. $2,700+ in 2026).

Yes, paying taxes hurts, but it is much cheaper than paying $120,000 for a year of nursing home care because Medicaid rejected you.

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Conclusion

Love is free, but caregiving labor has a market value.

Treat your family arrangement like a formal business transaction. Draft a contract today and handle the taxes correctly. It protects your daughter's income and protects your future eligibility for government aid.

Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Medicaid rules vary strictly by state. Always consult with a qualified Elder Law Attorney and a CPA to draft a Personal Care Agreement that meets your specific state's requirements.