Choosing Beneficiaries for Your HSA or MSA

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 primary beneficiaries. 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. 

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.

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. 

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.