If you are the owner of a Health Saving Account (HSA), you will want to consider choosing the beneficiaries carefully to minimize the tax consequences left to the selected recipient. It is important to designate a beneficiary for your HSA, just as you would for your IRA. Any funds that remain in your HSA after your death are payable to the named beneficiary on your account. Here are a few things to consider:
Your Spouse as Beneficiary
If your spouse is named as beneficiary it will become your spouse’s HSA upon your death. This will allow your spouse access to funds and enable them to make distributions for qualified medical expenses tax-free. Your spouse is not required to have HSA-eligible health insurance, but if they are eligible, they may make contributions also. Keep in mind you are not required to name a spouse or an individual who is qualified to make HSA contributions.
Your Children as Beneficiaries
You may name your children or other non-spouse a beneficiary whether you are married or single. The account will no longer be an HSA and the fair market value will become taxable to the recipient in the year of death. Except for any qualified medical expenses made for the original account owner and paid by the beneficiary within one year after death. Remember to take into consideration any tax consequences you may be leaving your beneficiaries.
Your Estate as Beneficiary
You may name your estate as beneficiary. But if the estate is the beneficiary, the total distribution is included on the deceased HSA owner’s final tax returns. For instance, if you are in a low tax bracket and your designated beneficiary is in a high tax bracket, the remaining HSA assets of your estate would be taxed at your lower tax rate.
As you can see naming your spouse may be the best strategy if you are married. However, selecting a beneficiary can become more complicated if you’re not married. This is due to the tax impact it could leave to your beneficiary. If this is the case, consider using as much of your HSA assets for qualified medical expenses during your lifetime as possible. After all this is its purpose.
In short, make sure you carefully consider your options when choosing the right beneficiary. Keep in mind life’s situations can change. Consider reviewing all your beneficiary designations after any major life changes and update as necessary.
Wondering what a Health Saving Account (HSA) is? Check out S is for Some Understanding of Health Savings Accounts (HSA)