Your Health Savings Account (HSA) isn’t just about covering medical bills—it’s also an asset that can play a meaningful role in your financial legacy. With its tax advantages and flexibility, an HSA has the potential to provide benefits well beyond your lifetime. Whether you’re building your estate plan for the first time or updating it to reflect changes in your life, considering how your HSA fits into your overall goals is a smart way to make the most of this valuable resource.
What Is a Health Savings Account (HSA)?
A Health Savings Account is a tax-advantaged savings account designed for individuals with high-deductible health plans (HDHPs). Contributions to an HSA are tax-deductible, and the funds grow tax-free. You can use the money to pay for qualified medical expenses at any time without paying taxes on withdrawals.
Unlike flexible spending accounts (FSAs), HSAs don’t have a “use-it-or-lose-it” rule; the balance rolls over annually and can grow significantly over time. Additionally, once you turn 65, you can use HSA funds for non-medical expenses without penalties, making it a versatile asset for current and future financial planning.
How Your HSA Is Treated After Death
When you pass away, the treatment of your HSA depends on the beneficiary you’ve named. If your spouse is the designated beneficiary, they can inherit the HSA and maintain it as their own, preserving its tax-advantaged status. This allows them to use the funds for medical expenses or withdraw money penalty-free for other purposes after age 65.
If you name a non-spouse beneficiary, the HSA doesn’t retain its tax benefits. Instead, the account’s value is included in the beneficiary’s taxable income for the year of your passing. This can lead to significant tax liabilities, especially for larger accounts. Alternatively, the funds may be used to cover qualified medical expenses incurred by the deceased, potentially reducing the taxable amount.
Incorporating Your HSA Into Your Estate Plan
Including your HSA in your estate plan ensures that this valuable asset benefits your loved ones and aligns with your overall financial goals.
Name and Update Your Beneficiaries
The first step in incorporating your HSA into your estate plan is naming and updating your beneficiaries. If your spouse is the designated beneficiary, they can inherit the account and maintain its tax advantages, allowing them to use the funds for medical expenses or other needs after age 65 without penalties. For non-spouse beneficiaries, however, the account’s value becomes taxable income in the year of your passing. To avoid unintended tax burdens or disputes, regularly review and update your beneficiary designations to reflect life changes, such as marriage, divorce, or the birth of a child.
Use Your HSA Strategically
An HSA can be a versatile tool for financial planning. During your lifetime, the account is a great way to cover qualified medical expenses, particularly in retirement. You can also earmark HSA funds for end-of-life medical costs, which can ease financial stress for your family. Thinking ahead about how and when to use these funds ensures they are maximized for your benefit and that of your loved ones.
Align Your HSA With Other Estate Planning Tools
Your HSA should work in harmony with other elements of your estate plan. By coordinating it with wills, trusts, and other accounts, you ensure consistency across your financial and legacy goals. In some cases, directing HSA funds into a trust may be a smart move to achieve specific objectives, such as long-term care planning or leaving a legacy.
How We Can Help You Plan
Planning for your Health Savings Account is an important part of building a comprehensive estate plan, and we’re here to make the process simple and effective. We’ll help you understand your options, whether it’s naming the right beneficiaries, aligning your HSA with other assets, or minimizing tax implications for your loved ones. Our goal is to ensure that your HSA supports your financial and legacy goals, both now and in the future.
Contact Our Experienced Orange County Estate Planning Attorneys
Your Health Savings Account is more than a medical fund—it’s a valuable part of your legacy. By including it in your estate plan, you can ensure it benefits your loved ones and aligns with your goals. Contact us today to create a personalized plan that secures your future and theirs.
