A growing number of seniors are providing a salary or other form of reimbursement to their family members who provide them with personal care. If you’re thinking of doing so, it can be a very good idea to draw up a written contract. This can make it easier to qualify for Medicaid, and can help a family in other ways as well.

It might seem odd to sign a contract with your family. Many children feel awkward about asking for compensation, and many parents assume that the children should help them solely out of love. However, children often devote enormous time and resources to caring for an aging relative, and it’s not unreasonable for them to be compensated in some way. And if there are several siblings and one is more involved in providing care than the others, a contract can be a good way to reward the child who is doing the work without having to divide family assets unequally in a will.

Here’s a good example of how a written contract can be helpful: Widley David entered a Louisiana nursing home in 2008. Over the next two years, he wrote six checks totaling about $50,000 to his nephew and his nephew’s wife, who were his closest living relatives. Widley said the checks were to reimburse the couple for the care they provided him in the nursing home.

The couple visited Widley every day, drove him to appointments, paid bills, and provided other services. The nephew even quit his job so that he could devote himself to Widley’s care.

After two years, Widley applied for Medicaid. But the state Medicaid officials found out about the checks, and said they were an improper attempt to reduce Widley’s assets so he could qualify for benefits.

According to the state officials, if Widley had signed a contract saying the payments were for personal care, that would have been fine. But since there was no written contract, there was no proof that Widley “owed” the money, and therefore the checks were treated as a gift.

As a result, Widley was disqualified from Medicaid for nearly 15 months, during which time he had to pay out-of-pocket for his nursing home care.

Widley took the case to court, but the Louisiana Court of Appeals sided with the state. It said that while Widley might have intended the checks as a form of compensation, a “personal care agreement was necessary to validate this alleged arrangement.” Otherwise, without a contract, Widley lost.

Not only are personal care contracts helpful with Medicaid, but they can also smooth over issues between siblings if one is more involved in handling a relative’s care than others. It’s not uncommon, for instance, for a sibling who lives at a distance to suspect that a caregiver sibling is mismanaging the senior’s affairs, taking advantage of the senior’s generosity, or being overcompensated in the senior’s estate plan. Putting everything in a contract creates transparency and can prevent such disputes.

It’s important to work with an attorney to draw up a personal care contract, to make sure it will pass muster with Medicaid or other agencies.

A good contract should specify what kinds of services the younger family member will perform – preparing meals, bathing, shopping, travel to appointments, paying bills, and so on – as well as roughly how many hours per week will be devoted to care.

A provider can be fairly compensated, but you should be careful not to pay too much, or the government might claim that the payments are really a disguised gift. A good rule of thumb is to pay an hourly rate roughly comparable to what a home health care aide would receive in the area.

Some people have offered to pay a child for a lifetime of care with a single lump sum. While this might work, and it quickly reduces assets for Medicaid purposes, it’s more likely to raise red flags with the state.

Ideally, the caregiver should pay Social Security, Medicare and other employment taxes, just like any other household employer. And if you want to make sure the arrangement isn’t challenged, it’s a good idea to keep a diary of services provided, and even have a geriatric care manager come in occasionally to verify that the senior is receiving the care set out in the contract.