Planning for caregiving later in life can feel overwhelming — whether it’s for someone you love or for yourself. If long-term or high-cost care is on the table, you’re probably wondering how to pay for it.
One option? Using a family trust to pay a caregiver.
Here’s what that means, and how it works.
Understanding family trusts
At a high level, a trust is a fiduciary arrangement in which one party (grantor) allows another party (trustee) to hold assets on behalf of a beneficiary or beneficiaries. There are several types of trusts, but for the purposes of this article, we will be discussing two major types: revocable and irrevocable.
There are many reasons to create a trust. Typically, those reasons have to do with the protection and direction of your assets, meaning you want to control who gets access to your assets and when. Some examples of events that may inspire individuals to create a trust include getting married, receiving an inheritance, selling a business, or completing their estate planning.
If you are creating a trust for your estate planning, you may plan to use the funds to pay for caregiving. If you already have a trust for another reason, you still may turn to those funds if it makes the most sense for your financial situation. Often, people use a trust to pay a caregiver when care will be long-term, high-cost, or both. As you are considering long-term estate planning for yourself or a loved one, it is a smart idea to explore creating a trust with your attorney and financial advisor.
Revocable trusts
A revocable trust — often called a living trust — is flexible. You can change or cancel it at any time. When you create one, you’re the grantor. You choose the trustee — usually yourself — and name someone to step in if you’re ever unable to manage it. Revocable trusts are popular due to their flexible nature, which leaves the door open for changes in the future, should your life circumstances change.
Irrevocable trusts
Irrevocable trusts are not flexible, and are difficult to change or revoke in the future. Once established, the trust is a separate legal entity, and the grantor doesn’t have direct control anymore because they have relinquished control to a trustee.
Paying a senior caregiver from a family trust
A family trust can act as the employer of a senior caregiver — as long as the trust documents allow it and you follow the rules for household employees.
Here’s how paying a caregiver from a trust works.
Legal possibilities and precedents
Generally, both revocable and irrevocable trusts can employ a caregiver. However, since trusts are primarily governed by state law, it’s important to check out the rules and regulations in your particular state before moving forward.
Once you have verified your specific trust can act as an employer, the next step is to get an Employer Identification Number (EIN). You can apply for that online with the IRS. You can use the EIN to register with the state or any other required entities (which are typically state-specific). This is the cornerstone of correctly and legally paying your caregiver from a trust.
Revocable vs. irrevocable trust rules for paying a caregiver
If you have a revocable trust, the trust will not be the employer of record for the caregiver. Instead, the grantor of the trust will be the employer of record. This means the grantor will get an EIN, and taxes will be filed in the grantor’s name. In this situation, because an individual is the employer of record, Poppins Payroll supports this type of household payroll.
If you have an irrevocable trust, the trust itself will be the employer of record because it is considered a separate legal entity. This means the trust itself will get its own EIN, and taxes will be filed in the trust’s name. Poppins Payroll does not support entity-level household payroll for trusts because trust EINs have different filing requirements than other employers.
Pros and cons of paying a caregiver through a trust
If you’re thinking about using a trust to pay for senior care, it helps to understand the pros and cons. There are real benefits — and a few important considerations before you move forward.
Advantages of paying a caregiver through a trust
One advantage of using a trust to employ a caregiver is the ability to keep caregiving payments and payroll structured and separate from your personal finances.
It can be easy to treat a caregiving relationship casually. This is a person coming to your home, who you may be friendly and close with, and it can be tempting to pay them “under the table.” But this isn’t following the law, and it can set you up for big headaches down the road.
When you are paying with a trust, you will have clear records of your EIN, your taxes, and all payments made to your caregiver. So if you were ever to be audited or need to provide accurate records, it is all readily available and already separate from your other finances.
Disadvantages of paying a caregiver through a trust
The potential disadvantage of paying a senior caregiver through a trust is the flip side of the advantage: it requires strict oversight to ensure it is managed appropriately.
Another issue to be aware of is that there are costs associated with creating a trust with your attorney. So if you don’t already have a family trust set up, be prepared to spend $1,500-$4,000 or more in legal fees.
Legal considerations when employing a caregiver from a trust
There are a few key legal details to keep in mind when using a trust to pay a senior caregiver — including the trustee’s responsibilities, payroll tax obligations, and IRS compliance requirements.
Role of the trustee
As discussed above, your trust’s trustee must be someone who is capable of handling this responsibility and understands their fiduciary duty.
In the case of a revocable trust, the grantor is often the trustee, and the grantor will be the caregiver’s employer. But in the case of an irrevocable trust, the trust is its own legal entity and the trust itself will be the employer. An irrevocable trust is directed by trustee(s), so it is again important that they understand their responsibilities as it relates to managing the trust and acting as an employer.
Payroll taxes and IRS compliance
In order to pay a caregiver from a trust compliantly, there are a few different household payroll requirements you need to know about. These include:
- Paying federal and state payroll taxes
- Social Security and Medicare Taxes (FICA)
- Federal Unemployment Tax (FUTA)
- State specific unemployment, if applicable.
- Income tax, if requested by your employee.
- Issuing Form W-2
- This is how you report your employee’s wages to the IRS, SSA, and to the employee themselves.
- Filing a Schedule H with the IRS
- This is how you report household employee taxes to the IRS.
- Creating a caregiver agreement
- It is smart (and in some states mandatory!) to create a written document to outline work and pay expectations.
- Complying with all state and local laws
- Some areas may have further requirements for household employers, such as purchasing Workers’ Comp insurance, having a written contract, or other obligations.
If you need help with your payroll obligations, consider using a household employee payroll provider like Poppins Payroll. (Important note: Poppins does not support situations where a trust itself is the employer of record for a caregiver. If a trust is the legal employer, it is treated as a separate entity and must operate payroll under its own EIN and file employer tax returns accordingly. Poppins does not support entity-level household payroll for trusts. However, Poppins can support arrangements where an individual is the household employer, even if trust funds are used to pay for care.)
Other considerations to keep in mind when paying a caregiver through a trust
It is very important to talk to your attorney and financial advisor when creating a trust with the intent to pay a caregiver. They can provide legal and financial advice to help make sure that it is the right choice for your unique situation.
Another consideration to keep in mind is that the grantor (be it you or somebody else) must adequately fund the trust to ensure there are sufficient resources available to make caregiver payments.
Steps to set up a family trust for caregiver employment
Now that you know the details of having a trust employ a senior caregiver, you might be interested in getting your trust set up as an employer right away. Here are the steps to prepare an existing trust to employ a senior caregiver:
- Check state law and your Certificate of Trust
- Find out if it is acceptable for your grantor or your trust to be an employer.
- Obtain an EIN
- Apply for an EIN with the IRS.
- Set up payroll and tax accounts
- Use your EIN to enroll to pay FICA and FUTA, then enroll in any state specific tax programs as well.
- If you need any help with payroll, select a household payroll provider like Poppins.
- Draft a Caregiver Agreement
- Make sure to review it with your new household employee.
- Maintain proper records
- Maintain all necessary tax and legal records, such as paystubs and tax forms, regarding your household employee.
Using a family trust to pay a caregiver for a senior in your life
If you are looking for ways to pay for long-term or high-cost caregiving, a family trust might be the solution you have been searching for. Take the time to discuss the pros and cons with your attorney and financial advisor to best understand if this would be a good use of your assets. If you are ready to dive in, make sure to sign up for an EIN and start paying your household employee compliantly. And if you need help with that part? Sign up for Poppins Payroll for a free trial and expert support.
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