If you have a Health Savings Account (HSA), you might think of that account the way you think of any bank account: accessible by you during your life, tax-free, for qualified medical expenses. While that is, largely, correct, it is important to know that HSAs are treated differently from regular bank accounts upon your death.
You may wonder, when planning your estate, whether your HSA should be titled in the name of your trust, whether you should instead list a beneficiary, and whom that beneficiary should be. While you should arrive at that answer with your estate planning attorney because there are many tax considerations involved, there are general guidelines as to how HSAs function and whom you should name as your beneficiary.
First, it is important to note that your HSA cannot be titled in the name of your revocable living trust. You can, however, name a beneficiary, which could be your spouse, your children, your trust, or other individuals. How your HSA is treated after your death will depend on who your beneficiary is – if your spouse is your beneficiary, he or she will be able to continue the HSA and use the funds for his or her qualified medical expenses. If your beneficiary is anyone other than your spouse, the leftover value becomes taxable to the receiving beneficiary in the year of the account owner’s death.
Notably, the Internal Revenue Service (IRS) Publication 969 advises that “[t]he amount taxable to a beneficiary other than the estate is reduced by any qualified medical expenses for the decedent that are paid by the beneficiary within [one] year after the date of death.”
Based upon these tax rules, if you are married, you should name your spouse as your primary beneficiary, allowing him or her the valuable option to continue the HSA after your death. This also avoids having to include the leftover HSA amount as taxable income on your final income tax return. An exception might be if you have children from a previous marriage and want to ensure that the proceeds eventually end up with your children, in which case your children should be listed as the primary beneficiary. However, this will cause the value of your HSA to be taxable income to your children, less any of your qualified medical expenses paid by them within one year of your death. If the children from a previous marriage are minors, you should consider naming your trust instead, to avoid causing the funds that are passed to the minors to be subject to court supervision.
If you are single, you must decide to either name a trust or name individuals as outright beneficiaries. Your decision should take into account whether the beneficiaries are minors, for reasons already mentioned. You should also consider the respective tax brackets of your intended beneficiaries and the value of your HSA.
Clearly, there are many options to consider when naming your HSA beneficiary. Due to the tax considerations involved, you should discuss your intentions with your estate planning attorney before arriving at a final decision. To learn more about your HSA beneficiary designation options, contact Mammel Law at 248-644-6326.