How do I set up a care contract and quanitfy the value of the service provided?

A contract with your sister may or may not be the best way to handle the situation and you should really speak with an attorney that handles elder law.

Establishing a caregiver contract is a tool that is used for Medicaid planning. In this case you are talking about her compensation being free room, board and spending money. A caregiver contract may not be a good strategy if their is not a block of assets that you are looking to transfer out of your parents name. In fact the free room and board aspect of your caregiver agreement would result in taxable compensation without your sister receiving the money to actually pay the taxes.

You also make reference to seeking aid and attendance benefits. You will have trouble trying to use a caregiver agreement as unreimbursed medical costs in order to qualify. You may be better off actually having your parents pay for professional care so you clearly establish the unreimbursed medical expesens.

Finally, you do not have to wait until their unreimbusred medicla expenses exceed their income. Depending on what level of benefit they may qualify to recieve, you can file when their income is higher than the unreimbursed medical expenses and still receive a benefit that is reduced for the excess inome.

You really should consult with an elder law attorney on this matter. Dealing with Medicaid is very complicated. Dealing with Medicaid and VA benefits requires real expertise to balance the differing rules of the two programs.