Editor’s note: Because it’s vital that you make an informed decision during your estate planning process, we’ve written a newer blog post: “What Happens to My HSA When I Die? Choosing A Beneficiary.” This new blog will help you determine how to choose the best HSA beneficiary and their tax obligations.
Estate planning and understanding is about as much fun as waiting in line at the DMV. However, understanding how to structure your accounts to minimize taxability for your benefactors ensure that more of your money becomes theirs.
We will review the IRS tax structures and how they impact your HSA funds when you die.
HSA Estate Tax Planning Considerations
Even though you might have a healthcare plan that is shared by your family, an HSA account is owned by the individual. You can, of course, use your HSA funds toward any eligible expenses for yourself and tax-dependents (including your spouse). So how does this impact how HSAs are transferred from an individual to a spouse, beneficiary or estate? We will explore that below.
What happens to my HSA funds if I die and I named the below person/entity as my beneficiary?
- If Your Spouse, there will be no tax implications. The HSA is transferred directly to your spouse. He/she can then continue using the HSA money for spending, saving or investing within the standard IRS guidelines. It remains an HSA and the same tax-advantaged rules would continue to apply.
- If Your Beneficiary (not your Spouse), the HSA ends on the date of your death. The funds will be distributed and taxed as income to the beneficiary based on the fair market value. However, the beneficiary can use the HSA funds to pay for medical expenses of the account holder for up to 12-months after their death.
- If Your Estate or No Beneficiary Designated, the HSA will be distributed to your estate and taxed as income on your final income tax return.
The good news is that if you are reading this, you are still living! We also put together an HSA Tax Guide so you can review the HSA IRS tax details and maximize your tax savings while having a clear view of your tax liabilities.
HSA Tax Guide
- What to Expect: HSA & Taxes
- HSA Tax Guide
- HSA Tax Form Checklist
- Do I Need to Wait for IRS Form 5498-SA to File My Taxes?
What to do next? Regardless of your age or income, the most important step is to log into your HSA platform and ensure you have a beneficiary assigned. There is no reason to delay, do this TODAY! Even if you don’t use your HSA funds, it’s nice knowing that someone will benefit from the health savings.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.