Four Ways To Estate Plan For An HSA

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Four Ways To Estate Plan For An HSA

The government encourages saving for medical expenses by allowing before-tax contributions to a Health Savings Account (HSA) which can grow without taxation on the condition the funds are used for qualified medical expenses (ranging from acupuncture to vaccines and from hearing aids to dental work – in other words, there is a laundry list of qualified medical expenses). In year 2022, the contribution limit for a self-only plan is $3,650 and $7,300 for a family plan. If one of the members of the family (i.e., one spouse) is 55 or older (you can’t contribute after reaching age 65), then an additional $1,000 (for a total of $8,300) can be contributed in year 2022. Since medical expenses usually increase as we age, this is a great way to save for future medical expenses.

There are four ways to plan how your HSA is transferred after you die.

  1. HSA owner does nothing. If the HSA owner fails to make any beneficiary designations, then the amount left in the account will be treated as income for the year of death of the deceased owner. It is not treated as an asset belonging to the estate of the deceased (since it is income). If the owner dies without a Will, then it passes by laws of intestacy.
  2. Spouse is designated as beneficiary. If the surviving spouse is named as a beneficiary, then (similar to a spousal rollover of an IRA) the surviving spouse can transfer the funds to his or her own HSA account and make withdrawals for qualified medical expenses as needed (therefore continued tax-deferred growth).
  3. Non-spouse beneficiary. Other than outstanding medical expenses from the HSA on behalf of the deceased owner within one year of the owner’s death (which would not be taxable), if a non-spouse (i.e., a child) is designated as a beneficiary the balance of the HSA would be treated as income to that beneficiary for the year of death of the account owner. It is no longer considered as an HSA. As a result (if you name your child as a beneficiary), it is often better for the HSA owner to spend the account on medical expenses during such owner’s life instead of using funds from a retirement account since the child can defer taxation from a retirement account unlike an HSA (which would result in immediate income taxation to the non-spouse beneficiary).
  4. Naming your Revocable Living Trust as a beneficiary. There are two situations in which you should name a Revocable Living Trust (RLT) as a beneficiary (an HSA cannot be owned by an RLT similar to an IRA) as follows:
    1. If you are single and have a potential beneficiary who is a minor, then you should consider naming a RLT as a beneficiary to avoid guardianship;
    2. if you are married and you have a taxable estate (which is $12,060,000 as of 1/1/22 – so most do not have taxable estates), then you can name an RLT (that has tax planning as part of the language of the trust) as the beneficiary of the RLT. Otherwise, just name your spouse as your beneficiary (unless it is a second or later marriage and you prefer your children to be the beneficiary)

If interested in learning more about this article or other estate planning, Medicaid and public benefits planning, probate, etc., attend one of our free upcoming virtual Estate Planning Essentials workshops by clicking here or calling 214-720-0102. We make it simple to attend and it is without obligation. 

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