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Welcome Carrot Fertility Members. Family Inceptions is now part of the Carrot Fertility Network. Click to read more.

A CPA’s Advice on Taxes, Escrow, and Funding – What Every Intended Parent Needs to Know

As the tax deadline draws closer – although now extended from April 15 to July 15, 2020 – the questions from intended parents pursuing surrogacy and egg donation continue to grow.

  • What surrogacy and egg donation expenses are tax deductible?
  • Do I need an escrow account, and if so, how does escrow work?
  • What are the pros and cons of different options for funding my surrogacy or egg donation journey – 401K loans, gifts from family members, fundraising and grants?

Eloise Drane, owner of Family Inceptions Surrogacy and Egg Donation Agency and host of popular fertility podcast Fertility Cafe, recently sat down with an expert in the financial side of third-party reproduction – Sonia Stewart. In addition to being a CPA, Sonia is the owner of Ally Escrow Management, and has been guiding intended parents through the intricacies of third-party reproduction finances for more than 20 years.

Download the full Fertility Cafe episode here – 06 | Family Building Financials: Talking Escrow + Taxes with Sonia Stewart – or search “Fertility Cafe” on your favorite podcast app.

Here are the highlights of the interview below, answering the pertinent questions every intended parent needs to know…

Why is escrow an essential part of  financing a surrogacy or egg donation journey?

Eloise Drane: I know we like to say that in modern family building, it takes a village to start a family. And you are an essential part of the village, obviously. So let’s dive into your role in the process and answer the questions so many intended parents and surrogates and donors are asking.

So my first question to you is when it comes to surrogacy and egg donation, why do you think an escrow account is essential and why couldn’t intended parents just manage the payments on their own?


Sonia Stewart: Honestly, I feel like there are two really big reasons why I wouldn’t recommend parents managing the payments on their own and these reasons are why I feel it’s essential to have an escrow account in this process. The first one, and honestly, probably the most important [reason] is the emotional component between the parents and the surrogate. Money has a really funny way of making discussions feel uncomfortable when there’s an emotional investment involved, and a third party as can be a little more on the outside and able to stick to the facts and the contract and be prudent when discussing these details of what is or is not covered or what needs to be turned in to validate costs and needs.

The other component is utilizing an experienced escrow company that has read many contracts, experienced various scenarios and views on how something would or should be looked at, greatly benefiting both the parents and the [gestational] surrogate.

On the average, intended parent or surrogates may have been through two or three contracts at most. I’ve seen over a hundred [contracts] and I have plenty of examples and a knowledge base to pull from in order to be a real asset to the questions [asked of me]. For example, the escrow agent can help guide the surrogate and guide her on what she needs to provide, or things that need to be communicated to the escrow agent, helping the process flow more smoothly through each stage as it progresses. And the parents can also depend on the escrow agent, making sure payments are made timely based on the terms of the contract and knowing that if there is something that isn’t quite clear, the escrow agent can get it identified and clarified in advance of the need. And for me, I have found that probably is the biggest help – as the contract start coming alive. People may understand the words of the contract, but then when [those words] start happening, sometimes it evolves into something they didn’t realize it meant or how it should actually play out in real life.


ED: So is escrow just for surrogacy or is there a lot of people that utilize it for egg donation as well?


SS: They do utilize it for egg donation. I focus heavily on surrogacy because [the journeys] are just so much longer of a time period than egg donations. Now, when I first started doing this, I did a lot more egg donations at first and now that I do more surrogacy, just by nature, it makes the egg donation seems so quick.


ED: Yes, yes. That I know. So can you share exactly how does escrow work? Can you walk us through a typical escrow account, how it’s funded, how payments are managed, what that whole thing looks like?


SS: Sure. In this industry, basically escrow means that someone has requested of me to hold cash on their behalf in order for a specified purpose such as an egg donation or a surrogacy obligation. And then part of that duty is distributing the cash in the manner designated, usually by several commitments made through an agency contract, an egg donation contract, a surrogacy contract, and sometimes even specific needs by the request of the intended parent. I have varying degrees of when I get pulled into the process. But normally, especially if working with an agency, once the agreement with the agency is signed, the agency asks the parents to go ahead and get established with an escrow company because there are processes and costs that happened while the surrogacy contract or egg donation contract is being formed.

With my company, I’ve had every extreme – parents who choose to mail check in to get it started; parents who wire the funds in, and some that will literally walk into their local branch of the bank that I use as my holding bank and deposit the funds directly into the account. And at that same time they’re signing an escrow contract with me in order to designate, “Yes, you are the person I would like to do this responsibility for me.”

 In the beginning of an escrow’s life, there’s a lot of coordination between the agency and myself, or even the parents, for events that are happening [so] I know what needs to be paid, and when it needs to be paid. These are usually for things like the screening process or getting health insurance established once the surrogacy contract is in place. Generally, I have the final guidelines I need to do my part, but I still need to know about certain events as they happen from the agency or the parents, just from a verification standpoint. Just because sometimes, for example, a surrogate might think, “Oh, I started medications” because they’ve started birth control pills. Well, that really isn’t the trigger for what that “started medications” compensation is for. So that’s why I have that secondary verification from the parent or the agency just to say, “Did they start the medications that we were looking for?” It helps me facilitate any of these financial aspects for the donor or the surrogate that are necessary. One of my favorite parts is when we finally have a heart confirmation! That’s always my favorite one. That triggers the future scheduling on the calendar for when payments will be released. That’s the milestone that really makes a big deal.


ED: Yeah. Because at that point you realize like, Oh, it’s real, it’s really happening for them and it’s exciting.


SS: Correct. At that time I choose to go ahead and do an overall review of the account and say, “okay, now that we were at this milestone, here’s what we think we’re going to need financially.” Normally my goal is to make sure that I don’t have to request funds any further. That [the escrow account] is all-encompassing. I base it on a few facts that I know, and hopefully we get to the end of the journey and it’s time to close the escrow account and I will be sending back a refund because I was able to make sure I covered all the events that we could anticipate.


ED: What criteria should intended parents consider when choosing an escrow company? There are several out there now, I’m sure as you know. What criteria would give the intended parents a peace of mind that this person is doing what they’re supposed to be doing, and I don’t have to worry about them like running off and taking off with my money.


SS: In my opinion, I think you really should depend on someone who has gone through credentialing which they [are required to] uphold throughout their state, such as an attorney or a CPA. I am partial to a CPA because I am a CPA. It’s a lot of work and there are a lot of things you have to do to maintain that status and there is an ethical standard that they are held to. Now for me being a CPA, I have a financial background, I understand numbers, and that’s really what I’m dealing with – the numbers aspect of this journey. If you can find somebody who has experience in the third-party reproduction world, that’s even better. Or at least someone who has done their homework and has learned how to read these contracts and understand what the parents and the surrogates are going through – that’s an even bigger help in this situation. Also, [the escrow manager] should be insured. Make sure they’re insured, not only for professional liability, but also cyber risk insurance. That’s a big thing nowadays. You have to make sure you protect your assets. I spend a lot of time making sure that all the bank credentials and everything I need to do is always in tip-top shape because that is exactly where [cyber criminals] like to attack.


ED: I know that there are some escrow agents that are attorneys, and then there are some that don’t have any background [in third-party reproduction or escrow management] at all there. They just want to run escrow accounts. I am partial to working with an escrow account that does have a CPA on staff because, like you said, you’re the one that’s actually dealing with the money side of things. But why do you feel that some people would want to work with an escrow account that’s managed by an attorney?


SS: I think there’s a legal aspect to that. I have dealt with several escrow companies that are attorneys, and I would say [escrow management] is more of a side thing for them. Their real bread and butter is the actual legal contracts that they happily do and they’re the good at it. But I would not say [a lawyer’s]  passion is numbers, which is where my skillset is. I love numbers. Things just click with me. I’m able to think of things quickly and understand the [financial] scenarios quickly. Not that [lawyers] can’t, it’s just their forte is more of the legal aspect, where my forte is more of the money and the financial aspect.


ED: What would happen if there was a dispute between the intended parents and the surrogates? What would you be able to do or not do? Or what should you do or can do when there’s a dispute and your’re in the middle?


SS: Unfortunately that has actually happened to me several times. Luckily all the scenarios that I’ve ever been a part of have ended successfully in some kind of arbitration, or even just an agreement without having to use a mediator. But for me, my obligation first starts to the parents. They are the ones who have hired me to go by the contract. I have provided guidance to the parents saying, “Well, this is why they’re being asked of this, and then here’s my experience, and I either do or do not think the surrogate has a justifiable cause to ask for whatever [she’s] asking for.” That has been very well received. I was very proud to be able to help them in that way because how they were reading [the contract] and how it was intended, may not have actually matched up. I do not release funds until there is an agreement when situations like that happen. Once you release the funds, it’s much harder to get that back. I want to make sure both parties are in agreement in some way, shape, or form before they say, “Yes. Okay, you can pay that.”


ED: What you’re paying from is based upon the gestational surrogacy agreement or the egg donation agreement, and it’s things that everybody has already agreed upon and have executed contracts on. Is that correct?


SS: I would say 90% of the time, yes. Sometimes there are medical bills that they weren’t anticipating, or their understanding of how insurance was going to pay or not pay causes a little bit of headache towards the end. That will cause some strife, not necessarily between the surrogate and the parent, but the intended parents, who were expecting no more than a $5,000 deductible, let’s say, and then now all of a sudden we’re at $7,500 or $8,000, and they start questioning why. Then we have to get to the bottom of that before I can pay the bill, and put them at ease that, yes, this is correct or, if maybe it’s not correct, and get a revised bill.


What surrogacy or egg donation expenses are tax deductible?

ED: So the benefit of working with the CPA as an escrow company is that you also know taxes! The one subject that I actually hate talking about, and actually hate doing come April 15th of every year. But with so much money exchanging hands over the course of surrogacy or egg donation journeys, the next logical question would involve Uncle Sam and the IRS, right? So for intended parents, what expenses, if any, related to surrogacy and egg donation are tax deductible?


SS: All right. This has been a very tumultuous affair for us with the IRS for quite some time. Let me first start by saying: one of the biggest things you [will] come across and the biggest hurdle is the “medical need” for the costs that you’re going to either request, or go ahead and deduct on your tax return. Unfortunately, [the medical need requirement] sometimes upsets people that are in same-sex relationships because if there’s not an actual medical need, then they feel like they have not been given any opportunity. And as of right now, that has not changed. I’m hoping it will change for the future. But right now, the things that have been allowed [to be deducted] based on medical need are things like: the cost of freezing your eggs, the cost of a sperm donation, or even the freezing of sperm, IVF costs including post-procedure costs connected with that process, the egg retrieval process, which includes the donor’s fee, and the medical and psychological testing, plus the agency and legal fees all related to [the egg donation] process. And then of course the medical costs for the baby after the baby is born can be deducted as “medical need.”

There are costs that are questionable and are not said as, “Yes, they are deductible at this time.” This includes things such as: surrogacy compensation, the medical bills before and during the pregnancy for a surrogate, the medical insurance related to a surrogate, and then the agency and legal fees related to getting a surrogacy contract in place.

Even though, currently, the code does not specifically allow surrogacy and egg donation expenses as “deductible,” [the IRS] has Private Letter Rulings that have happened, which is known as a PLR in the tax world. The purpose of a PLR is to basically get specific permission from the IRS to deduct these expenses that are not 100% clear by law. I do want to preface that with, even though you may know somebody or have read about a PLR that has been granted to someone that basically their expenses mirror your expenses and their health conditions mirror your health conditions, please know that [a previously granted] PLR cannot be used as a benchmark for your claim. For each situation, we need to go through the process of getting your own PLR to support the deduction request, which you can do with a CPA, or a certified tax professional can assist you in the PLR process. Just make sure you know that the first question they’re going to ask you is, “Is this medically necessary?” and know that it’s going to take three to six months to get a response for a PLR. You should probably request [a PLR] sooner versus later. The IRS will actually send you a letter back that says “yes” or “no” on their decision and you would need to include that with your tax return.


ED: So with the PLR, it’s not something where they can get a pre-invoice of what [the treatment] is going to look like, and then submit it to the IRS even before they start the process? Or does it had to have happened already, and then after it’s all done, that’s when they can submit the PLR?


SS: No, they can be going through the [surrogacy and egg donation] process. Let’s say they’re doing it right now. They can go ahead and get a PLR in place for the 2020 tax season for the things that they’re going through right now. Or they can wait [and submit the PLR after the fact]. Let’s say they’re talking about 2019 – [parents] can file an extension on their return and go ahead and get the PLR process started for what has happened so far, and hope that they are successful [in being granted the PLR].


Can I pay for surrogacy or egg donation expenses using my HSA?

ED: Now we know what can be utilized or can’t be utilized as tax deductibles for intended parents. Can intended parents pay any of the surrogacy or egg donation expenses out of a Health Savings Account (HSA)?


SS: While you cannot use your HSA to pay for things related to a surrogate or egg donor directly, you can use it for the expenses related to your specific costs related to your body or your spouse’s body, including the IVF process, or once the baby has been born. Keep in mind there is an annual limit to what you can contribute to an HSA. Planning early would be really important and you might want to span [the funding] over two to three years, so that you can get the HSA built up to the cost that you expect to have.


What to keep in mind when funding your third-party reproduction journey

ED: There’s plenty of different ways intended parents can fund their journeys. Some may have the cash saved up and are able to pay for the process without a problem. Or some intended parents require a combination of efforts to pull the money together. Some take the money out of their retirement accounts, some from their IRA or 401k. Some intended parents get money from a family member. Some take out loans. Some apply for charitable grants. Some [intended parents] even do fundraising through websites like Go Fund Me. Can you touch on what intended parents need to keep in mind when using these various funding methods?


SS: Some of the things to consider if you do take money directly out of your 401k, there would probably be a penalty involved for early distribution. But you could take a loan out of your IRA. And the ironic thing about taking a loan out of your IRA is you’re paying yourself back the interest versus a credit card where you’re paying interest to somebody else.

Now the gifts, there are ways that you can have people pay medical facilities directly versus giving you the money directly – that changes the gift rules. You can receive, I think, $14,000 a year as a gift that’s non-taxable to you or to the person who’s donating it. But if [the gift giver] is paying [the money] directly to a medical institution that changes the rules a little bit. And really that’s probably the best way to do it – if someone like your parents or a sibling is helping you, have them pay the medical bills directly [to the medical facility], as that changes how it’s treated [by the IRS].


ED: So if they pay the medical bills directly… let’s say they paid the medical bills, and it was $10,000, directly to the medical facility, and then they wanted to gift you that up to that $14,000 limit. As far as the IRS is concerned, you only really received that $14,000?


SS: Correct. The gift of the medical bill [payment] actually goes against a lifetime contribution versus that annual limit [of $14,000].


Need more information on the financial aspect of surrogacy and egg donation? Contact Sonia Stewart and Ally Escrow Management

ED: Well Sonia, thank you for taking the time to explain and educate us on the financial aspect of third-party reproduction, the information you shared I’m sure it will be invaluable to so many, especially with this tax season quickly approaching. We’ll definitely provide a link to Ally Escrow Management on our Resources page. In the meantime, do you mind sharing how our listeners can contact you?


SS: They sure can. They can go to allyescrowmgmt.com or they are free to call me anytime at 770-904-1404



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