Health Savings Accounts offer a unique combination of tax advantages, allowing individuals to save for healthcare costs while enjoying tax-free growth. However, many people overlook the role those accounts can play in their estate plans. Properly coordinating health savings accounts and estate planning goals ensures that their value is preserved and benefits your heirs. Many companies offer these health savings accounts (HSA) to their employees, including Beck, Lenox & Stolzer Estate Planning and Elder Law, LLC.
Understanding the Role of HSAs
HSAs are available to individuals enrolled in high-deductible health plans (HDHPs). Contributions are tax-deductible, earnings grow tax-free and withdrawals for qualified medical expenses are not taxed. This triple tax benefit makes HSAs an attractive savings tool, particularly for those planning for healthcare costs in retirement.
However, HSAs differ from other financial accounts in estate planning. After the account holder’s death, the tax-free benefits largely disappear unless the beneficiary is a spouse. Non-spouse beneficiaries must include the entire value of the account as taxable income in the year they inherit it, significantly reducing its value.
Strategies for Integrating HSAs into Estate Plans
To minimize tax liabilities for heirs, consider using HSA funds for qualified medical expenses during your lifetime. This approach reduces the taxable portion of your estate and ensures that the funds are used in the most tax-efficient manner.
Name a Spouse as Beneficiary
If you are married, naming your spouse as the beneficiary of your HSA preserves its tax benefits. Upon inheriting the account, your spouse can continue to use it for qualified medical expenses without incurring taxes. This strategy extends the utility of the HSA, while delaying any taxable event.
Plan for Non-Spouse Beneficiaries
For non-spouse beneficiaries, strategies to minimize the tax burden should be considered. These may include:
- Distributing HSA funds strategically to avoid large, single-year tax bills.
- Encouraging beneficiaries to use the funds for qualified medical expenses reduces taxable income.
Consider Charitable Giving
Designating a charitable organization as the beneficiary of your HSA eliminates taxes, as charities are not subject to income taxes. This strategy ensures that the full value of the account benefits a cause you care about, while avoiding taxation for heirs.
Coordinate with Other Accounts
HSAs should not exist in isolation from your other financial assets. Aligning them with retirement accounts, taxable investment portfolios and trusts ensures that your estate plan reflects a cohesive strategy.
Benefits of Coordinating HSAs with Estate Plans
Integrating HSAs into your estate plan offers several advantages:
- Preservation of Value: Thoughtful planning minimizes tax liabilities for heirs, preserving more of the account’s value.
- Flexibility: HSAs can serve as a supplemental resource for healthcare costs or charitable giving.
- Alignment with Goals: Including HSAs in estate planning ensures that they contribute to your broader financial objectives.
Working with an Estate Planning Lawyer
Because HSAs have unique rules and implications for estate planning, consulting an estate planning lawyer is essential. An experienced attorney can help you navigate complex tax regulations, optimize beneficiary designations, and align your HSA strategy with your overall plan. Current clients of Beck, Lenox and Stolzer are free to call our office directly to schedule a review. Prospective clients may schedule a free phone consultation here, or may call our office as well.
Planning for a Healthy Financial Legacy
Health Savings Accounts are more than just a healthcare savings tool—they are an integral part of a comprehensive estate plan. By understanding their unique characteristics and implementing strategic planning, you can maximize their benefits for yourself and your heirs, while ensuring that your estate plan reflects your long-term goals.
Key Takeaways
- HSA Tax Advantages: HSAs provide tax-free growth and withdrawals for qualified medical expenses. However, non-spouse beneficiaries face significant tax liabilities.
- Spousal Benefits: Naming a spouse as the HSA beneficiary preserves its tax-free status and extends its utility for medical expenses.
- Minimizing Tax Burden: For non-spouse beneficiaries, strategic distributions or use for medical expenses can reduce taxable income.
- Charitable Designations: Naming a charity as the HSA beneficiary eliminates taxes, while supporting causes you care about.
- Estate Plan Integration: Aligning HSAs with other accounts and estate planning tools ensures a cohesive financial strategy.
References: Charles Schwab (Feb. 12, 2023) “Are HSAs the New IRAs?” and Charles Schwab (Oct. 9, 2024) “What is an HSA?”
