Article from Offit Kurman: The Weekly Scenario: Health Savings Account Beneficiary

4/28/17

Steve Shane

Question: Can an HSA owner name a beneficiary on his Health Savings Account (HSA)?

Answer: Yes, an HSA owner can name a beneficiary. This would work similarly to an IRA owner. Upon the death of the HSA owner, the balance of the account is payable to the beneficiary named on the account.

Question: What happens when the HSA beneficiary is the spouse?

Answer: At death, similar to a spousal IRA rollover, the HSA will become the spouse’s own HSA. The spouse beneficiary can maintain the HSA in his or her own name and can continue to access the funds. Distributions for qualified medical expenses will be income-tax free just as they would have been to the deceased account owner. A spouse beneficiary does not have the option to keep the HSA as an inherited HSA.

Question: What happens if the HSA beneficiary is a child or someone other than the spouse?

Answer: The results with respect to a non-spouse HSA beneficiary is not as favorable. The account value of the HSA becomes taxable to the non-spouse beneficiary in the year of death. As mentioned above, there are no inherited HSA accounts and the stretch treatment is unavailable.

Comment: Because of the tax hit a non-spouse HSA beneficiary may face by having to take a taxable lump sum distribution, clients with non-spouse beneficiaries may want to consider taking tax-free distributions from their HSAs to pay for medical expenses. As a reminder, you may reimburse yourself for qualified medical expenses paid out-of-pocket in previous years as long as those expenses occurred after the HSA was established.

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As always, if you have any questions or would like to learn more, please contact me at sshane@offitkurman.com or 301-575-0313.

ABOUT STEVE SHANE

Steve Shane provides strategic counseling to clients in need of estate administration, charitable giving and business continuity planning while minimizing estate, gift, and generation-skipping transfer tax exposure. He offers legal guidance to clients on asset protection and the proper disposition of assets in accordance with the client’s objectives, while employing tax planning techniques such as the use of irrevocable trusts, life insurance planning, lifetime gifts and charitable trust. He is also experienced with drafting documents for business planning, the incorporation and application for exemption for Private Foundations and the administration of decedents’ estates.

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