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  • Amy Privette

Don't Let Your HSA Slip Away. Put in Play a Beneficiary Today!

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Many people ask the question: "Can I add a beneficiary to my Health Savings Account?" Not only can you add a beneficiary to your Health Savings Account (HSA), but you should add a beneficiary! If you fail to name a beneficiary, then any funds remaining in your HSA after your death will have to pass through probate. That exposes your HSA to needless delays in processing, plus probate fees and commissions will be assessed on the funds held in the HSA. Your loved ones will watch as the account balance dwindles and slips away needlessly. Don't let that happen! Plan for a beneficiary!

Before you name your beneficiary, though, make sure you understand the mechanics how the HSA account will be transferred upon your death, the limitations on how these funds might be spent by the beneficiary, and the potential tax issues at play. There are four typical beneficiary categories: your spouse, your adult child or other family member, your trust, and a charitable organization. Here's what you need to know about each option:

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Your spouse: Your Health Savings Account actually becomes your spouse’s account. There are no major tax implications to be considered if your spouse inherits your HSA. Still, spouses under the age of 65 need to use the funds for qualified medical expenses to avoid taxation on the money. For spouses over 65, their ability to use inherited HSA funds is less restricted.

Your adult child or other relative: A Health Savings Account cannot rollover to a non-spouse. Instead, the HSA will be closed and the funds distributed to your beneficiary. The monies received will need to be reported as ordinary income on the beneficiary's taxes. As an alternative, the beneficiary is allowed to use the HSA funds to pay your qualified medical expenses for up to 12 months after your death. Any expenses paid on your behalf would reduce the amount subject to taxation for the beneficiary.

Your trust: Using your trust as the beneficiary will operate similar to how it works for non-spouse family members. The HSA will be closed, the account value distributed to the trust with the trust reporting the taxable income (though if the trust is a conduit trust where income received is distributed back out to trust beneficiaries, the income would be reported on a K-1 Schedule and the trust beneficiaries would be responsible for taxes owed).

Charity: There are no tax implications when naming a charitable organization as your HSA beneficiary. The charity would receive 100% of the remaining funds. If there are sufficient assets already passing to your heirs and you do not want to increase their tax burden or push them into a higher tax bracket, then designating a charity as your beneficiary would be a great choice!

You could also name your estate as the beneficiary of your HSA, but doing so is the functional equivalent of not naming a beneficiary at all. Either way, the HSA becomes a probate asset that must pass through the court before it gets to your heirs. In addition, the full value becomes taxable to the estate.

Most people do not keep large balances in HSAs, which is all the more reason why you should consider your beneficiary options. With careful planning, you can stretch a little a long way. Feel free to contact us by phone or email and we'll be happy to walk you through naming a beneficiary for your HSA.

Phone: (919) 678-5761

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