Does it sound like we are doing things properly to satisfy the IRS and Medicaid?

igoo572, this is a concern and the lawas are so hard to understand on the employee vs contract labor. In this case, my mom lives in the caregivers home, so in essence part of the money that goes to the caregiver each month is for rent, laundry, housekeeping, food and transportation. The rest is for a small payment for services rendered (which are a lot). I (with mom's money) pay her $2000 a month for all of that and she should get more, but the highest I (with mom's money) could ever pay her is $3000 a month in order to make the 5 year look back.

I am not really sure. I believe the revocable trust is just to avoid probate and give me (as POA and Trustee) a little more power. On the revocable, my Mom and myself are the Trustees (because she wants and needs to write checks for the hairdresser, etc.). On the irrevocable trust, my sister and I are the trustees.
On both trusts, there is only one signature required. The irrevocable trust really has very little money (about $50,000). The reason being that I wanted my Mom to have options if she ever needed Medicaid. The $50,000 will give us a little money to work with to get her into a good facility that will take Medicaid. My understanding is that it is tough to get a good facility to take you if you are already on medicaid. Hopefully she has enough in the revocable trust to make it the 5 year look back. It will be tight.

Miller - you do need to make sure that SIL meets the IRS criteria for contact labor. The 1099 is what is done for contract labor. W-2 is done for employees including household employee's. There is another poster on this site (claire) who is a CPA so perhaps she can detail that for you.

In the past, I have hired care providers from an agency so the agency takes care of IRS/tax stuff and I also (paid through a LLC) paid an individual caregiver EOY through a 1099 as they met the criteria to be contact labor and it was a short term limited period of time situation. This is a big item for whether or not contract labor is applicable. SIL may actually be a "household employee" which has lots more tax specifics. Now trusts, LLC, Inc's, etc have a lower rate of IRS inquisition so it may not be an issue but if the SIL situation is going to be several years you want to get it right the first time so no penalty later on that you have to deal with. Good luck.

I sounds great to me! If only more families would be cooperative and collaborative in setting things up! But then this site would see alot less traffic.

Why is there a revocable and irrevocable trust? I've never seen this before.

It sounds good if the legal documents are good. The plan must allow for funds to be available for the next 5 years (lookback). After that, the language tightens availability of funds up for government benefits. I've seen trusts from attorneys that are lock boxes from the beginning and will cause problems if applying for medicaid within the 5 year period. Caregivers agreements will be called for review by medicaid if/when you apply, so must pass musters then. If the elderlaw attorney mostly practices medicaid planning, probably good documents. If he chases ambulances as the major area of practice, you may want to have the plan reviewed by an attorney who's major area of practice is medicaid/asset protection.