Choosing Beneficiaries for Your HSA or MSA

Your Best Choices for HSA Beneficiaries

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Updated June 29, 2021

A health savings accounts (HSA) or medical savings account (MSA) is a type of asset that represents a taxable contract right. It's like a bank account that's dedicated to paying for qualified medical expenses during your lifetime, but then it's treated more like a retirement account upon your death.

Both HSAs and MSAs come with some distinct tax advantages, but they're only available to those who have high-deductible healthcare plans in place. You can't change the actual owner of the account to your revocable living trust, or to anyone else for that matter. But you can designate one or more beneficiaries to receive your HSA or MSA at the time of your death.

Who you choose should be subject to several considerations.

If You're a Married Account Holder of a Nontaxable Estate

The most logical and tax-friendly beneficiary for your HSA or MSA is usually your spouse, particularly if your estate isn't large enough to be subject to an estate tax—and many are not.

Surviving spouses can elect to treat these accounts as their own if there's anything left at the time of the other spouse's death and if they're designated as the primary beneficiary. This will avoid having the balance of the account 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 unused portions of the accounts to their own beneficiaries at the time of their deaths.

If You're a Married Account Holder of a Taxable Estate

Consider naming your revocable living trust as the primary beneficiary of your HSA or MSA if you're married and your estate is taxable.

This is different from naming it as the owner of the account, and it will ensure that your estate tax exemption can be used to fund AB Trusts created under the terms of your trust for the benefit of your spouse.

The main drawback to naming your trust is that the fair market value of the HSA or MSA must be included on your final income tax return, but the taxable amount can be reduced by any qualified medical expenses that are paid on your behalf within one year of your death.

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

If You're a Married Account Holder in a Second or Later Marriage

Consider naming your children or other beneficiaries as the primary beneficiaries of your HSA or MSA if you're in a second or later marriage.

The main drawback to naming someone other than your spouse as the primary beneficiary is that the fair market value of the HSA or MSA will have to be included in each non-spouse beneficiary's taxable income. But again, the taxable amount can be reduced by any qualified medical expenses that are paid on your behalf within one year of your death.

If You're a Single Account Holder

You have two options for your primary beneficiary if you're single: your revocable living trust or individual beneficiaries.

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. Someone would be appointed to manage the asset for them until they reach the age of majority otherwise if the asset passed directly to them, but your trust and its trustee can serve in that role if you name the trust instead.

Just as with other beneficiaries, the account must be included in their taxable income, less any qualified medical expenses that are paid on your behalf within one year of your death.

A Word About Marriages

Federal law has recognized same-sex marriages since 2015, so these rules and provisions for married couples address all unions, at least at the federal level. Domestic partnerships and civil unions are governed by individual state laws, however. The federal government doesn't recognize them so these rules for spouses would not necessarily apply.