What happens to an HSA as part of an estate?

High Deductible Health Plans (HDHPs) are a popular choice with Americans who buy insurance. When combined with the tax benefits of a Health Savings Account (HSA), you can feel less anxious about the possibility of a healthcare emergency. When creating your estate plan, it’s important to understand how the funds in your HSA may be affected by who you choose as your beneficiary.

What is an HSA?

Health Savings Account (HSA) is an investment account that is tax-exempt as long as the funds are used for qualified medical expenses. Both the contributions and interest or earnings accumulated through the account are tax-free and can be used for any qualifying medical expense for both the HSA holder and their family if they are included in the account.

What happens when your spouse is the beneficiary of your HSA?

In the event of your death, if your spouse is named as the beneficiary of your HSA, they can continue to benefit from the tax exemption benefits if they use the funds for qualifying medical expenses. The account will become theirs, and they will become the policyholder.

Do non-spouse beneficiaries receive the same tax benefits normally associated with an HSA?

No. A non-spouse beneficiary will not receive the same tax benefits. Instead, they will be converted into a different type of account that becomes taxable in the same year as the death of the HSA holder.

Can you leave the funds in your HSA to a charity?

You can choose to leave the funds in your HSA to a charity of your choice. This option could be a good decision if you know your account will not benefit your spouse. The funds in your HSA will remain untaxed if they are contributed to a charity.

When deciding who to name as your beneficiary on your HSA, the greatest potential tax benefits would be available to a spouse. If you choose to leave the funds from your HSA to a charity, the money remains tax deductible for the charity, which will likely be appreciated. Finally, if you choose to leave your HSA to a non-spouse beneficiary, the value of the account will no longer be tax-exempt.

When deciding how to proceed with any aspect of estate planning that you are unsure of, an experienced legal professional can guide you through the nuances and unique characteristics of a complex estate plan.

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