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When crafting an estate plan, most people focus on major assets like homes, bank accounts, investments, or retirement plans. However, one often-overlooked asset deserves your attention: the Health Savings Account (HSA). Understanding what happens to your HSA after you pass away is critical to ensuring your estate plan aligns with your financial and family goals. In this post, we’ll explore why your HSA should be included in your estate plan and how to manage it effectively.

What Is an HSA?

A Health Savings Account (HSA) is a tax-advantaged account designed for individuals enrolled in a high-deductible health plan (HDHP). HSAs offer triple tax benefits:

• Contributions are made with pre-tax dollars (or are tax-deductible).
  • Example: Sarah, a 40-year-old employee, enrolls in a high-deductible health plan through her employer. She contributes $3,000 to her HSA directly from her paycheck in 2025. Because the contributions are made pre-tax, her taxable income is reduced by $3,000, lowering her income tax liability for the year. Alternatively, if Sarah were self-employed and contributed $3,000 to her HSA from her personal funds, she could claim a $3,000 tax deduction on her federal income tax return, reducing her taxable income.
• Earnings grow tax-free.
  • Example: John has $5,000 in his HSA, which he invests in a low-risk mutual fund offered by his HSA provider. Over five years, the account earns $1,000 in interest and capital gains, growing to $6,000. Unlike a regular investment account, where earnings might be subject to annual taxes, John pays no taxes on the $1,000 in earnings because they accrue tax-free within the HSA.
• Withdrawals are tax-free when used for qualified medical expenses.
  • Example: Maria, age 50, uses $2,500 from her HSA to pay for a dental procedure and prescription medications, both of which are qualified medical expenses under IRS rules. Because she uses the funds for eligible expenses, the $2,500 withdrawal is completely tax-free, meaning she owes no federal income tax or penalties on that amount.

These advantages make HSAs not only a powerful tool for managing healthcare costs but also a strategic component of long-term financial planning. For 2025, the IRS allows individuals to contribute up to $4,300 and families up to $8,550 annually, with an additional $1,000 catch-up contribution for those 55 and older. In 2026, individuals will be able to contribute $4,400 and families will have a limit of $8,750.

What Happens to an HSA at Death?

The treatment of an HSA after death depends on who you name as your beneficiary:

• Spouse as Beneficiary
  If your spouse is the designated beneficiary, the HSA simply becomes your spouse’s HSA. This transfer is tax-free, and your spouse can continue to use the funds for qualified medical expenses.
• Non-Spouse Beneficiary
  If you name a child, grandchild, or anyone else as your beneficiary, the HSA stops being an HSA at your death. The account’s fair market value at the time of your passing becomes taxable income to the beneficiary in the year of your passing. Depending on the account balance, this can result in a substantial tax liability.
• Trust as Beneficiary

A trust can be named as a non-spouse beneficiary of an HSA. The trust must be valid under state law and have identifiable beneficiaries. Upon your death, the HSA does not cease to be an HSA, but distributions to the trust are subject to specific tax rules. If the trust uses the funds for qualified medical expenses, those distributions remain tax-free. However, non-qualified distributions are taxable as income to the trust, potentially at higher tax rates if the trust is not a “see-through” trust. Naming a trust can add complexity, as the trustee must manage and distribute the funds according to the trust’s terms and IRS rules.

• Estate as Beneficiary
  If you fail to designate a beneficiary, the HSA balance is paid to your estate and included in your final income tax return. This typically results in less favorable tax treatment. Additionally, estate distributions may face probate, complicating the process for your heirs.

Why Include an HSA in Your Estate Plan?

Given these rules, your HSA should be an integral part of your estate planning conversation. Here are a few key considerations:

• Beneficiary Designations: Just as with retirement accounts and life insurance, your HSA beneficiary designations supersede any provisions in your will or trust. Keeping these up to date is essential. Additionally, inform your beneficiaries about the HSA and its tax implications to help them plan for any potential tax liabilities.
• Tax Planning: Naming your spouse as the beneficiary is the most tax-efficient option. If your spouse is not available, consider consulting a financial or tax advisor to explore strategies that could reduce the tax impact, such as timing distributions or leveraging deductions.
• Coordination With Other Assets: Your HSA is one piece of your overall estate. Making sure it aligns with your broader estate plan helps ensure a smooth transition for your loved ones.

Final Thoughts

An HSA can be a powerful tool during your lifetime, but without proper planning, it can also create unnecessary tax burdens for your heirs. Reviewing your HSA beneficiary designations and integrating this account into your estate plan is a crucial step in protecting your family and maximizing the benefits of your hard-earned savings.

At Botti & Morison, we take a team approach to estate planning and are here to help you make informed decisions about every asset in your estate—including HSAs. If you’d like to review your plan or discuss your options, we invite you to schedule a consultation.

Thanks for reading.
Chris Michail, Esq.

This blog is for informational purposes only and does not constitute legal advice. Every situation is unique, and you should consult a qualified attorney for advice tailored to your specific circumstances.