A personal services contract is generally a contract between a parent and a child, son or daughter-in-law, and/or grandchild or their spouse (here after called the caregiver child). In the contract the parent agrees to pay for the services provided and the caregiver child agrees to provide the services.
Federal Medicaid law, and therefore State Medicaid law, requires a personal services contract be in place for the payment made to the caregiver child to be counted as the parent's valid debt rather than as a gift to the child. If there is no personal services contract in place and payments for helping the parent are made, Medicaid will consider these payments to be gifts because the parent isn't under a legal obligation to pay for future services and the caregiver child isn't under a legal obligation to provide future services. In addition, reimbursement to a child (caregiver or not) for expenses are also counted as a gift, if it can not be verified the expense actually occurred (a receipt).
At the time of application, Medicaid will total all of the gifts (payments) made in the 60 months prior to the parent's Medicaid application and divide that total by the average cost of a nursing home in the state. The quotient is the penalty period which equals the number of months that Medicaid will not pay for room and board at the nursing home. In general, the caregiver child will have to return these payments to the parent, as the parent will have to privately pay these nursing home fees during the penalty period.
A Florida court has held that a personal services contract can not be created by an agent under a valid power of attorney if the document does not specifically state that the agent may create the personal services contract. Therefore the payments that were made under this invalidated personal services contract were also invalid and the caregiver children were forced to return the payments to the parents so that they could make payments to the nursing home during the penalty period.
Each state has its own version of these laws. In Michigan, the doctor must first certify that the parent needs each service before the caregiver child can be paid for providing that service, and the personal services contract must be witnessed and notarized. In Ohio, children are being prosecuted for unjust enrichment (they weren't entitled to the payment or gift). For the payment to be a valid debt of the parent, the Ohio caregiver children are required to keep time logs of services provided, the parent must provide the caregiver child with a 1099, and the caregiver child must report the income on their income tax return. In addition, the personal services contract must be witnessed and notarized.
With respect to Medicaid, the general rule is it doesn't matter what the law is at the time you made the payment or created the personal services contract. With Medicaid in order to qualify, you must be in compliance with the law at the time the Medicaid application is made. For example, perhaps at the time of creation of the personal services contract Medicaid in your state was not requiring the document to be witnessed and notarized but at the time of the parent's Medicaid application they do require the document to be witnessed and notarized. In this example, all payments made under that personal services contract will be considered gifts and not valid debts because the document was not witnessed and notarized. Only those payments made under a second personal services contract that was witnessed and notarized would be considered valid debts of the parents.
As a general rule, even if you think that your parent will never go on Medicaid, its better to prepare as if they were going to go on Medicaid. Comply with all the rules, then if they must go on Medicaid, there won't be a problem. You should act like there will be a problem and protect yourself accordingly.