designate beneficiary for an HSA account


B

Brew1

first a quick summary of the rules:
if your spouse (must be opposite sex to count with the feds) is your
beneficiary, it transfers to them as an HSA--obviously a good thing.
if the beneficiary isn't your spouse, the transfer is fully taxable as
income.

What, if any, is the benefit of designating a non-spouse as a
beneficiary (assuming that you're not a multi-millionaire)? Wouldn't
it be better for the HSA to go into the estate, taxed according to the
estate tax rules? Also, it seems easier for the administrator of the
estate to use the money to pay for medical expenses incurred before
the owner died.

Thanks, I'm teaching a course on HSA's and the textbook says you
should always designate a beneficiary--I'd like to be able to explain
why.
 
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M

Mark Bole

Brew1 said:
first a quick summary of the rules:
if your spouse (must be opposite sex to count with the feds) is your
beneficiary, it transfers to them as an HSA--obviously a good thing.
if the beneficiary isn't your spouse, the transfer is fully taxable as
income.

What, if any, is the benefit of designating a non-spouse as a
beneficiary (assuming that you're not a multi-millionaire)?
Not a tax benefit, but if you don't have a will, this would be a simple
form of estate planning. The beneficiary doesn't have to accept it,
after all.

Wouldn't
it be better for the HSA to go into the estate, taxed according to the
estate tax rules?
The basis to the estate for income tax purposes will be the decedent's
basis (no step-up), so there's still income tax to pay. (This is a form
of income in respect of a decedent). The full value of account will be
included in the gross value of the estate, however.

-Mark Bole
 
M

Mark Bole

Mark said:
Not a tax benefit, but if you don't have a will, this would be a simple
form of estate planning. The beneficiary doesn't have to accept it,
after all.



The basis to the estate for income tax purposes will be the decedent's
basis (no step-up), so there's still income tax to pay. (This is a form
of income in respect of a decedent). The full value of account will be
included in the gross value of the estate, however.
I also found the following in a US Treasury dept presentation on HSA's.
It still indicates that income tax must be paid by someone, but it
appears I was wrong to state that it is IRD.

"To the extent the spouse is not the beneficiary:
– The account will no longer be treated as an HSA upon the death
of the individual
– The account will become taxable to the decedent in the
decedent’s final tax return if the estate is the beneficiary,
otherwise, it will be taxable to the recipient.
• Taxable amount will be reduced by any qualified medical expenses
incurred by the deceased individual before death and paid by the
recipient of the HSA
• The taxable amount will also be reduced by the amount of estate
tax paid due to inclusion of the HSA into the deceased individual’s
estate"

-Mark Bole
 
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B

Brew1

Mark Bole wrote:
I also found the following in a US Treasury dept presentation on HSA's.
It still indicates that income tax must be paid by someone, but it
appears I was wrong to state that it is IRD.

"To the extent the spouse is not the beneficiary:
– The account will no longer be treated as an HSA upon the death
of the individual
– The account will become taxable to the decedent in the
decedent’s final tax return if the estate is the beneficiary,
otherwise, it will be taxable to the recipient.
   • Taxable amount will be reduced by any qualified medical expenses
incurred by the deceased individual before death and paid by the
recipient of the HSA
   • The taxable amount will also be reduced by the amount of estate
tax paid due to inclusion of the HSA into the deceased individual’s
estate"

-Mark Bole
that's interesting--thanks, Mark.
 

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