There is more to an estate plan than just a will. Other assets are included in estate plans, including financial accounts. Most financial accounts function the same for estate planning purposes. However, health savings accounts—often referred to as HSAs are treated differently in estate plans and from a tax perspective. Health savings accounts allow individuals to contribute money to them to then be used for medical expenses. Because health savings accounts are treated differently than other accounts, below are common questions and explanations about HSAs in estate plans.
What is a Health Savings Account?
A health savings account (HSA) is a health insurance account where qualified individuals can contribute up to $3,600 per year—and $7,200 for families—on a pre-tax basis. These funds can then be withdrawn, tax-free, to use on medical expenses. However, individuals can only contribute to health savings accounts if they have a high deductible health plan.
What Happens to a Health Savings Account When the Owner Dies?
If an individual dies with funds left in their health savings account, it can be passed on to someone else. There are a few outcomes for the health savings account when the account owner dies. These outcomes depend on who the individual named as the beneficiary to receive the HSA’s benefits.
- If the account owner designated their spouse as the beneficiary, then the health savings account becomes the spouse’s own HSA. This means the spouse’s name is merely added to the account and they can take the assets from the account to pay for their own medical expenses. In this instance, the HSA is not included in the estate since it becomes the spouse’s property.
- On the other hand, if the HSA owner designates a non-spouse as a beneficiary, like a child, then the health savings account is handled differently. Once the account owner passes away, the account is immediately turned into a taxable distribution—unlike when a spouse is a beneficiary. This is distributed to the beneficiary in its entirety. The beneficiary must include the HSA balance in their taxable income for that year. However, any portion of the HSA balance that was used for the initial owner’s medical expenses within a year of their death will not be taxed. In this instance, the health savings account is also not included in the estate—but must be incorporated into the estate plan.
Because health savings accounts are unique in estate planning, individuals with an HSA should contact an experienced estate planning attorney for assistance navigating this process.
Contact a Houston Estate Planning Attorney
If you or a loved one needs counsel on incorporating a heath savings account into a Texas estate plan, contact the attorneys at McCulloch & Miller, PLLC. With attorneys who are up to date on federal and state estate planning laws, they can assist you with any questions you may have. Additionally, if you do not have an estate plan in place, our lawyers can assist you with this process. To schedule a consultation and to speak with one of our attorneys, give us a call today at 713-333-8900.
Note: The information in this blog is for informational purposes only and is not intended to provide tax or legal advise. McCulloch & Miller, PLLC is not a tax or CPA firm.