Personal Service Contracts In Michigan: Why Family Caregivers Must Get This Right

This article about personal care agreements by attorney Nicole Wipp is not intended to be legal advice. It is for informational purposes only. For advice specific to your situation, contact us today at (248)278-1511.

Family caregiving is one of the most loving—and most legally risky—roles a person can take on, especially when caring for an aging parent.

Every day in Michigan, adult children, spouses, and other relatives step in to care for aging loved ones. These arrangements are often formalized through personal services contracts, which are legal agreements that specify the services, payments, and documentation required to comply with Medicaid rules and facilitate Medicaid planning. They cook meals, manage medications, help with bathing and mobility, and often provide supervision that would otherwise cost thousands of dollars per month.

Over time, caregiving becomes not just emotionally demanding but financially unsustainable. It is entirely reasonable—and often necessary—for family caregivers to be paid for the care they provide.

But here is the hard truth: getting paid without the right legal structure can destroy Medicaid eligibility.

This is where caregiver contracts come in—and where so many families make costly mistakes.

What Are Personal Services Contracts For Caregivers?

A caregiver contract (also called a personal care agreement or personal services contract) is a formal legal agreement between an individual who needs care and the person providing that care. In Michigan, these contracts are commonly used when a family member, such as an adult child, provides care and receives compensation.

A contractual agreement must be in place before any caregiver services are provided to comply with Medicaid rules.

A caregiver contract is a legal document and a written contract that clearly outlines the services to be provided, compensation, and other legal considerations.

When done correctly, a caregiver contract allows:

• A family caregiver to be paid legally

• Medicaid to recognize the payments as legitimate expenses

• Assets to be spent down without triggering a Medicaid penalty

When done incorrectly (or not done at all), those same payments are treated as gifts, with serious consequences.

Why A Personal Care Agreement Is Necessary Under Michigan Medicaid Rules

Michigan Medicaid rules are extremely strict. Medicaid does not care how loving your intentions are or how necessary the care may be. What matters is documentation, structure, and compliance.

From Medicaid’s perspective:

• Money paid to a family member without a valid contract is a gift

• Gifts made within the five-year lookback period create a penalty period

• During the penalty period, Medicaid will not pay for care

To qualify for Medicaid, individuals must meet an asset limit. If you have excess assets above this asset limit, you must spend down those excess assets to become eligible. However, Medicaid has a 5-year Look-Back Rule that scrutinizes asset transfers to prevent individuals from giving away assets to qualify for benefits. Personal service contracts, also known as personal care agreements, can help you spend down excess assets by paying for legitimate caregiving services, rather than making gifts, and do so without violating the Look-Back Rule.

This is where families are blindsided. They believe they are doing the right thing—keeping a loved one at home—only to discover later that years of caregiver payments have disqualified them from benefits.

Caregiver contracts are not a loophole. They are a recognized planning tool—but only if they are done correctly.

The Myth of “Just Paying the Caregiver”

One of the most common pieces of bad advice we see is:
“Just pay yourself from mom’s account for the care you’re providing.”

This advice is wrong.

Without a properly drafted caregiver contract:

• There is no proof of fair market value

• There is no defined scope of services

• There is no enforceable obligation

• There is no Medicaid protection

Calling payments “care,” “help,” or even “salary” does not matter. Medicaid looks at the transaction—not the label.

What Makes a Caregiver Contract Medicaid-Compliant in Michigan?

Caregiver contracts, also known as personal services contracts, must meet very specific standards. These are not optional. To be Medicaid-compliant, the contract must clearly specify the types of care services and personal care services being provided, along with payment terms and documentation requirements.

1. The Contract Must Be in Writing and Signed Properly

Verbal agreements do not count. Handshake deals do not count.

The contract must be:

• In writing (a written contract)

• Signed by the person receiving care or their legal agent, and by the caregiver

• Signed before any caregiver services are provided

• Notarized (recommended for validity)

• Specify the start date when services will begin and the duration of the agreement (which can be short-term or for the life of the individual)

Payments to caregivers must be made for future services only; retroactive payments are considered gifts and can jeopardize Medicaid eligibility.

Retroactive contracts are almost always rejected by Medicaid.

2. The Caregiver Must Be Paid Fair Market Value

Medicaid does not allow inflated wages or informal family arrangements.

The contract must clearly state:

• Hourly or monthly compensation

• The caregiver's pay rate and how care payments are determined

• How the pay rate aligns with Michigan market rates

• Payment frequency

• A detailed description of all services to be provided and the frequency of those services

The pay rate must be reasonable and consistent with the going rate for care in the area to avoid being considered a gift by Medicaid.

Overpaying creates a gift. Underpaying raises red flags. Precision matters.

3. The Services Must Be Clearly Defined

“Providing care” is not enough.

The contract must specify:

• Personal care assistance (bathing, dressing, toileting, and other daily living activities)

• Household tasks (meal preparation, preparing meals, grocery shopping, laundry, cleaning)

• Supervision and safety

• Providing transportation (to medical appointments and social activities)

• Services provided (a detailed list of all care tasks and support offered)

The agreement must include a detailed description of all services provided, the frequency of those services, and the caregiver's pay rate.

Vague contracts fail.

4. Payments Must Match the Contract Exactly

If the contract says 20 hours per week at a specific rate, the payments must match exactly.

Lump sums, irregular payments, or undocumented reimbursements can invalidate the entire arrangement. If a personal service contract is paid in a lump sum, the lump sum payment must be carefully calculated using an actuarial life table and the care recipient's life expectancy to comply with Medicaid rules. This ensures the payment is not considered a gift, which could affect Medicaid eligibility. Additionally, if a lump sum is paid and the caregiver fails to provide care, the payer risks losing that money.

5. Documentation Is Essential

Time logs, caregiver notes, and payment records must be maintained. Caregivers should keep a detailed daily log of services provided and payments received to support the legitimacy of the personal service contract and ensure Medicaid compliance. Medicaid may request proof that services were actually provided.

The Role of Powers of Attorney

Caregiver contracts require legal authority.

If the person receiving care lacks capacity, the contract can only be created if there is a properly drafted financial power of attorney that allows it.

Many powers of attorney:

• Prohibit self-dealing

• Do not allow caregiver contracts

• Block Medicaid planning entirely

This is why elder-law-specific drafting matters. Having a power of attorney is not enough. It must be the right power of attorney.

What About Veterans Benefits and Aid & Attendance?

Many families ask an important question:

“If my loved one is receiving VA Aid & Attendance, do we still need a caregiver contract?”

The answer is nuanced—and this is where families often get into trouble.

VA Improved Pension (Aid & Attendance) Is Different

The Veterans Improved Pension with Aid & Attendance has far more flexible rules than Medicaid.

In many cases:

• VA benefits do not strictly require a formal caregiver contract

• Informal caregiving arrangements may be accepted

• The VA does not apply Medicaid-style divestment penalties

Because of this, families are often told—or assume—that formal agreements are unnecessary.

And strictly speaking, for VA benefits alone, that may be true.

The Problem: VA Benefits Are Not Enough Long-Term

VA Aid & Attendance is helpful—but it is not comparable to Medicaid in terms of financial value.

• VA benefits are capped monthly payments

• Medicaid can cover thousands of dollars per month in long-term care costs

• Medicaid may become necessary later as care needs increase

Here is the critical mistake we see:

Families plan only for VA benefits and ignore Medicaid rules—without realizing that VA-friendly decisions can quietly destroy future Medicaid eligibility.

Payments to family caregivers that are acceptable under VA rules may later be treated as gifts under Medicaid.

By the time Medicaid is needed, the damage is already done.

Why Ignoring Medicaid Because of VA Benefits Is Risky

Even if your loved one qualifies for VA Aid & Attendance today:

• Care needs may increase

• In-home care may no longer be sufficient

• Nursing home care may become necessary

• VA benefits may fall far short of actual costs

At that point, Medicaid becomes essential.

If caregiver payments were made for years without a Medicaid-compliant contract, those payments can trigger a long Medicaid penalty period, leaving families with no coverage when they need it most.

Planning only for VA benefits is short-term thinking. Elder law planning must look ahead.

Why DIY Caregiver Contracts Still Fail

Families often try to handle this themselves by:

• Downloading templates

• Copying agreements from friends

• Relying on advice from non-lawyers

• Planning for VA benefits only

Unfortunately, Medicaid does not care how the VA treated the arrangement.

DIY contracts often fail because they:

• Are retroactive

• Overpay the caregiver

• Lack specificity

• Conflict with Medicaid rules

• Exceed power of attorney authority

When that happens, Medicaid rejects the contract entirely.

The Consequences of Getting It Wrong

When caregiver contracts fail, families may face:

• Months or years of Medicaid ineligibility

• No coverage for in-home or facility care

• Forced spend-down of assets

• Financial strain on caregivers

• Family conflict

Most families only learn this after it’s too late to fix.

Why Elder Law Legal Advice Is Essential

Caregiver contracts sit at the intersection of:

• Michigan Medicaid rules

• VA benefit considerations

• Contract law

• Power of attorney authority

• Long-term care planning

This is not general estate planning. This is elder law.

Only a qualified elder law attorney understands how to coordinate VA benefits without sacrificing future Medicaid eligibility. Consulting professionals, such as elder law attorneys or financial advisors, can provide valuable guidance when creating a caregiver contract.

Michigan Caregivers Deserve Protection—Not Guesswork

A properly drafted caregiver contract can:

• Legitimize caregiver compensation

• Protect Medicaid eligibility

• Coordinate with VA benefits

• Reduce financial stress

• Provide peace of mind

But only if it is done right—and done early.

Talk to a Michigan Elder Law Attorney Before You Act

If you are caring for a loved one in Michigan, receiving VA Aid & Attendance, or considering paying a family caregiver, do not assume you are protected.

Medicaid planning mistakes are often irreversible.

Call Us Today: (248) 278-1511

Caregiving is hard enough. Make sure the law is working with you—not against you.