Many advisors suggest drawing up a formal employment agreement, especially if the disabled elder ever considers applying for Medicaid. The joint state-federal benefits program, which provides a degree of long-term care for people of extremely limited means, disqualifies candidates who intentionally transfer assets just to make the cutoff. That means routine payments to a family caregiver "will raise a red flag, unless there's a family-care contract," says Fine.

What's in that contract can vary, but it shouldn't be taken lightly. "Payments must be reasonable and customary for the region," says Michael Fliegelman, an independent financial advisor in Greenlawn, N.Y. "While the process may seem as simple as drawing up a family care or personal service contract that specifies the number of hours a week, the rate per hour and the job responsibilities of that family member, the reality is these are complicated, and families need to see a professional."

Similarly, transferring assets of any sort to pay for care can be deemed a sneaky attempt to game the system. "It's critical to be very careful anytime someone who might be eligible for Medicaid, now or in the future, gives away property or sells it at bargain prices," asserts Michael Floyd, a professor at Samford University's Cumberland School of Law, in Birmingham, Ala. "There are enormous traps for the unwary in the Medicaid eligibility and disqualification rules."

Defusing Sibling Rivalries
Another advantage of formalizing the family caregiver's duties and compensation is that it tends to defuse any possible future tension with other heirs. Consider the problems that may arise later, for instance, if the elderly person pays only one of the three adult children as a caregiver and the other two resent the depletion of their future inheritance. "They may say, 'You manipulated the situation, turned mom against us and acted as an undue influence,'" warns David Okrent, an accountant and estate law attorney in New York. "That's why I always encourage families to let everyone know what they're doing from the outset. By putting the whole family on notice, you can avert a lot of complications later."

Sometimes it's necessary to go a step further, however. Okrent says the family should carefully document the loved one's valuable possessions when the caregiver first goes in. "Put together a list of assets and even take pictures of the house and its contents so the other kids can't come forward later and say, 'While you were there as a caregiver, you took away the baby grand piano!'"

Of course, sibling rivalries may come into play sooner rather than later. "For many families, the first thing they'll talk about is who is best suited for coping with the care-giving challenges," notes Lewis Walker, a financial advisor who specializes in estate planning, family care and special-needs issues at Norcross, Ga.-based Walker Capital Management Corp. "A lot of times, the one who picks up the ball feels stuck with it. He or she just happens to be the closest geographically, or the only one who doesn't have small children still at home, and gets kind of drafted involuntarily."

So Walker recommends that the family start with a free-flowing family discussion to talk through these issues and come to an understanding. He tries to facilitate, to point out that fair compensation is a good way to help an overburdened sibling feel appreciated for the hard work of caregiving. "Often, family caregivers don't feel entitled to ask for pay," he says. "They don't know if it's a legitimate request to bring up."

The psychotherapy doesn't necessarily end there. "One of our clients had to get psychiatric counseling because her 95-year-old mother, for whom she was caretaker, was in so much pain and was so feisty, frustrated, angry and fearful that she kept lashing out," Walker recounts. "It was just brutal."

Walker also coaches other financial advisors dealing with these emotional complexities. Planners and wealth managers "tend to be left-brain types, and this takes moving into the right-brain area," he says. "It can be difficult stuff. You have to ask clients to face some really tough, deep questions."

To get the ball rolling, he often gives clients a hypothetical situation about a couple with three grown children. "Suppose it's 3 a.m., and the husband is having a stroke or heart attack," he says. "The wife calls 911. But who gets the second call?"