What You Should Know Before You Name an HSA Beneficiary
If you have an HSA, you will want to give some thought to what will happen to this account after your death. The rules are a little tricky and careful planning is important to minimize the tax bite.
You should name a beneficiary for your HSA, just as you would for your IRA or company retirement plan. After your death, any funds remaining in your HSA are payable to the beneficiary you named on the account. You are not required to name a spouse or an individual who is eligible to make HSA contributions.
Naming Your Spouse
If you name your spouse as your HSA beneficiary, at your death the HSA will become your spouse’s own HSA. They can maintain the HSA in their own name and can continue to access the funds. Distributions for qualified medical expenses will be income tax free. Your spouse does not need to have HSA-eligible health insurance to continue to hold the HSA. However, if they do and they are eligible, they may make contributions to the HSA.
Naming Your Children
You may also name your children or another non-spouse beneficiary. However, you should be aware that non-spouse HSA beneficiaries do not fare very well! The account value of the HSA account becomes taxable to the non-spouse beneficiary in the year of your death. That means the entire account will be taxable in one year. That could be a significant tax hit!
The amount taxable to your beneficiary is reduced by any qualified medical expenses for the deceased HSA owner that are paid by the beneficiary within one year after the date of death.
Naming Your Estate
It is also possible for you to name your estate as your HSA beneficiary. There is a special rule that applies if the beneficiary of an HSA is the estate. If the estate is the beneficiary, then the total distribution is in included on the deceased HSA owner’s final tax return.
Naming a spouse may be a good strategy if you are married. If you name your spouse, he or she can continue to access the HSA tax-free for medical expenses after your death.
Things get more complicated if you are not married or do not want to name your spouse as beneficiary. For example, if you are thinking of naming your son or daughter as your HSA beneficiary, you will want to consider the tax impact of a lump sum distribution on their tax return. You might consider planning to use more of your HSA assets during your lifetime to pay for qualified medical expenses. You can even reimburse yourself for medical expenses in prior years, as long as those expenses were incurred after you established your HSA.
While it is usually not a good idea to name your estate as the beneficiary of your IRA or company retirement plan, that may not be the case with your HSA. There may be situations where naming the estate may make good sense as a strategy to minimize taxes.
For example, if you are in a low tax bracket and your child is in a high tax bracket, it may make sense for you to name your estate as the beneficiary instead of your child. The HSA distribution to the estate would be included on your final income tax return and taxed at your lower rate. If you leave it to your child outright it would be taxed at your child’s higher rate.
Don’t overlook your HSA beneficiary designation. Be sure to think it through carefully and remember that if your situation changes in the future, you can update your HSA beneficiary form at anytime.
Content Citation Guidelines
Below is the required verbiage that must be added to any re-branded piece from Ed Slott and Company, LLC or IRA Help, LLC. The verbiage must be used any time you take text from a piece and put it onto your own letterhead, within your newsletter, on your website, etc. Verbiage varies based on where you’re taking the content from.
Please be advised that prior to distributing re-branded content, you must send a proof to [email protected] for approval.
For white papers/other outflow pieces:
Copyright © [year of publication], [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] Reprinted with permission [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] takes no responsibility for the current accuracy of this information.
Copyright © [year of publication], Ed Slott and Company, LLC Reprinted with permission Ed Slott and Company, LLC takes no responsibility for the current accuracy of this information.
For Slott Report articles:
Copyright © [year of article], Ed Slott and Company, LLC Reprinted from The Slott Report, [insert date of article], with permission. [Insert article URL] Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.
Please contact Matt Smith at [email protected] or (516) 536-8282 with any questions.