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Choosing Beneficiaries for Your Health or Medical Savings Account

Designating Your Spouse or Trust

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A Health or Medical Savings Account is a type of asset that represents a taxable contract right, so you can't change the owner of the account to your Revocable Living Trust. Instead, you'll need to designate one or more beneficiaries to receive your "HSA" or "MSA" when you die. Here are some things to consider when choosing the beneficiaries of your HSA or MSA.

Married Account Holder - Nontaxable Estate

If you're married and your estate isn't taxable, then the most logical and income tax friendly beneficiary of your HSA or MSA is your spouse. Why? Because if there's anything left in the account at the time of your death and your spouse is designated as the primary beneficiary, then your spouse can elect to treat the account as his or her own HSA or MSA. This, in turn, will avoid having the balance of the account included in your taxable income on your final income tax return and allow your spouse to use the account for his or her own qualified medical expenses.

Married Account Holder - Taxable Estate

If you're married and your estate is taxable, then you should consider naming your Revocable Living Trust as the primary beneficiary of your HSA or MSA. This will insure that your separate estate tax exemption can be used to fund the AB Trusts created under the terms of your trust for the benefit of your spouse. The main drawback to naming your trust is that the fair market value of the HSA or MSA will need to be included on your final income tax return. Note, however, that the taxable amount can be reduced by any qualified medical expenses that are paid on your behalf within one year of your death. You should consult with your estate planning attorney to determine if your spouse or trust should be named as the primary beneficiary.

Married Account Holder - Second or Later Marriage

If you're in a second or later marriage, then you should consider naming your children or other beneficiaries as the primary beneficiaries of your HSA or MSA. This will insure that the account passes to your chosen beneficiaries. The main drawback to naming someone other than your spouse as the primary beneficiary is that the fair market value of the HSA or MSA will need to be included in each non-spouse beneficiary's taxable income. The taxable amount, however, can be reduced by any qualified medical expenses that are paid on your behalf within one year of your death. You should consult with your estate planning attorney to determine if your spouse or other beneficiaries should be named as the primary beneficiary.

Single Account Holder

If you're single, then you have two options for your primary beneficiary: your Revocable Living Trust or individual beneficiaries. If any of the beneficiaries of your Revocable Living Trust are minors, then you'll need to name your trust as the primary beneficiary to insure that the account doesn't become subject to a court-supervised guardianship on behalf of a minor. Note that while the account will need to be included in the taxable income of your beneficiaries, the taxable amount can be reduced by any qualified medical expenses that are paid on your behalf within one year of your death. You should consult with your estate planning attorney to determine if your trust or other beneficiaries should be named as the primary beneficiary.
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