Choosing Beneficiaries for Your HSA

A health savings account (HSA) is an account that you put tax-deductible, interest-earning money in to use for medical costs. It's like a bank account that's used only for medical care during your lifetime. When you set up an HSA, you can choose one or more people to receive any funds that are left over if you pass on before using them all.

Learn more about choosing your HSA beneficiaries, who you can name, and how they will deal with taxes.

Naming a Beneficiary

The person or people you name receive the funds that are left over from your health savings account. You can name anyone you like to receive what's left. But you can't make them the owner of the account.

You can also name a trust if you have one. But like a person, you can't make the trust the new owner of the account either.

Upon your death, your HSA is treated more like a retirement account. The left over funds can be taken out as needed without taxes for medical reasons. The person you leave it to can also take money from it for other uses; if they do, the IRS taxes it as income.

You should think about who you choose carefully, but you can leave your HSA to anyone you want. When you're thinking about who to leave it to, think of who would benefit from it the most. Also, think about who might not use it well. For instance, if a friend or distant family member needs help with medical costs and your spouse won't need the funds, you could leave it to them.

Married HSA Holder

The most logical and tax-friendly beneficiary for your HSA is your spouse. Your spouse can treat the HSA as if it were their own if they're the primary beneficiary and there's anything left. This keeps the account balance from being included in your taxable income on your final income tax return. The proceeds aren't subject to probate, either.

Surviving spouses can pass on any funds left in the accounts to their own beneficiaries at the time of their deaths.

Registered Domestic Partners

It's important to note that federal law has recognized same-sex marriages since 2015. These rules and provisions apply to all married couples.

Married HSA Holder in a Second Marriage

Many people have been married more than once. If this is you, you should be sure to update your beneficiary so that the people you want to get any funds receive them. You might want to split the HSA between your ex or current spouse or divide it between your children.

Naming only your children or non-relatives as the primary beneficiaries of your HSA if you're in a second or later marriage is an option. However, it might help to talk it over with your newest spouse to see how they would react to becoming a beneficiary or how they'd react if they weren't one.

The main drawback to naming someone other than your spouse as the primary beneficiary is that the fair market value of the HSA will have to be included in each non-spouse beneficiary's taxable income.

Using a Revocable Trust as a Beneficiary

You could create a revocable living trust and name it as your beneficiary. Any funds you have left in the HSA will be transferred to the trust. The main drawback is that the fair market value of the HSA must be included on your final income tax return, which means taxes will need to be paid.

If you had any unpaid medical costs left over, your beneficiary could use the funds to pay those bills. This reduces the taxable amount if the bills are paid within one year of your death.

Consult your estate planning attorney to determine if your spouse or trust should be named the primary beneficiary.

Single HSA Holder

If you're single, you have two options for your primary beneficiary: your revocable living trust or other people like friends, children, or distant family members.

You'll have to name your trust as the primary beneficiary to ensure that the account doesn't become subject to a court-supervised guardianship proceeding if any of the beneficiaries are minors.

You would appoint a trustee to manage the asset for them until they reach the age of majority. Otherwise, it cannot be touched or managed if the asset passes directly to them. A trustee can make sure that the trust is used in the manner you wanted. 

If you named any other people, they'd have to include the funds in their taxable income for that year. However, if they use it to pay any qualified medical costs on your behalf within one year of your death, they can subtract that amount from the taxes they'll pay.