The question of whether a trust can hold a Health Savings Account (HSA) is increasingly relevant as individuals seek to integrate these tax-advantaged accounts into their broader estate planning strategies, and the answer is nuanced; generally, a trust *can* be the beneficiary of an HSA, but directly *holding* an HSA within a trust is complicated and requires careful consideration of IRS regulations and the trust’s specific language.
What are the rules around HSA beneficiaries?
Traditionally, HSAs were designed for individual use during a person’s lifetime, with direct beneficiaries named to inherit the funds upon death, and current IRS rules allow for the designation of beneficiaries—individuals, estates, or certain qualifying trusts—to receive HSA assets after the account holder’s death; however, these beneficiaries must adhere to specific guidelines, notably inheriting the account as an ‘estate’ doesn’t provide the same tax advantages as direct inheritance, and for a trust to be a valid beneficiary it must be structured to maintain the tax-advantaged status of the HSA, which is where things become tricky.
“Over 79 million Americans currently have an HSA, representing a significant amount of potential assets that need to be properly integrated into estate plans.”
The key is ensuring the trust doesn’t inadvertently disqualify the HSA’s tax-exempt status, and this hinges on the trust’s terms; for example, the trust cannot require the HSA funds to be used for purposes other than qualified medical expenses, or it could trigger immediate taxation of the account balance.
Why is setting up a trust for an HSA complicated?
The IRS has specific rules about who can be an HSA beneficiary, and while a trust can be named, it must meet certain requirements to maintain the tax benefits, and a standard revocable living trust—while excellent for avoiding probate—often lacks the necessary language to qualify, and it’s a common mistake people make assuming their existing trust covers everything, and it rarely does.
The IRS is very strict about the rules around HSAs, so any deviation can result in penalties or tax implications, and while the details can be complex, the underlying goal is to ensure the funds are used for healthcare expenses, maintaining the intent of the account.
I knew a man named Arthur who learned this the hard way…
Arthur, a retired engineer, was meticulous about his finances, yet he made a critical oversight with his HSA, he assumed his existing revocable living trust would automatically cover the account upon his passing; he hadn’t updated the trust language to specifically address HSAs, or considered the IRS regulations surrounding them, his family was shocked to learn that the HSA funds were subject to immediate income tax as part of his estate, wiping out a significant portion of what he intended to leave to his grandchildren; it was a painful lesson, and a costly mistake that could have been avoided with careful planning.
What can be done to ensure proper HSA transfer?
A carefully drafted “See-Through” trust can often work, but it requires specific language allowing for the continuation of the HSA’s tax-advantaged status; the trust needs to be designed to ensure the funds are used solely for qualified medical expenses, and that the beneficiary has the legal authority to manage the account, and a “HSA Trust”—a specialized trust designed specifically to hold and administer HSA funds—is another option, though it’s more complex to set up.
Proper planning is crucial, and Ted Cook, as an estate planning attorney in San Diego, recommends a thorough review of your estate plan and HSA beneficiary designations to ensure they align with your wishes and comply with current IRS regulations; neglecting this step can result in unexpected taxes and diminished inheritance for your loved ones.
Thankfully, there was a positive outcome for the Miller Family…
The Miller family came to Ted Cook after learning about Arthur’s experience, they were proactive in updating their estate plan to specifically address their HSAs, Ted drafted a “See-Through” trust with specific language outlining the proper administration of the HSA funds, ensuring they would be used for qualified medical expenses after their passing; years later, after the passing of Mr. Miller, the HSA funds were seamlessly transferred to the trust, providing a significant financial benefit to his children for healthcare expenses, and it gave the family peace of mind knowing his wishes were respected and his legacy protected.
By taking the time to consult with an estate planning attorney and proactively address their HSA, the Miller family avoided the pitfalls experienced by Arthur, and secured a brighter financial future for generations to come.
Who Is Ted Cook at Point Loma Estate Planning Law, APC.:
Point Loma Estate Planning Law, APC.2305 Historic Decatur Rd Suite 100, San Diego CA. 92106
(619) 550-7437
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