HSA inheritance rules depend on the beneficiary: a spouse can treat it as their own HSA, maintaining tax benefits, while a non-spouse beneficiary loses the HSA status; the full value becomes taxable income, though they can deduct the deceased's medical expenses paid within one year of death to reduce the tax. For non-spouses, the funds must generally be withdrawn within 10 years under the SECURE Act, and the account stops being an HSA at the owner's death.
For a Surviving Spouse
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Funds remain tax-free for qualified medical expenses, and withdrawals after age 65 are penalty-free, just like any other IRA.
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A spouse can even get reimbursed for the deceased's medical bills paid within one year of death.
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The spouse can roll the HSA into their own account and continue using it as a tax-advantaged account.For a Non-Spouse Beneficiary (Child, Friend, Trust)
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The account ceases to be an HSA at the owner's death.
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The Fair Market Value (FMV) of the account at the time of death becomes taxable income for the beneficiary in the year of death.
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The beneficiary can use funds to pay the deceased's medical bills (incurred before death) within 12 months of death to reduce the taxable amount.
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Under the SECURE Act, all funds must typically be withdrawn within 10 years of the original owner's death, though rules for conduit trusts can vary.
Planning Considerations-
Naming a trust for a non-spouse can help manage distributions and potentially spread the tax burden, depending on the trust structure.
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Because of the significant tax implications for non-spouses, it's crucial to consider the HSA's tax treatment when naming beneficiaries and balancing your overall estate plan, notes.
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