Health Savings Accounts (HSAs) are fantastic during your lifetime, but what happens to that money when you’re gone isn’t always intuitive. In fact, HSAs behave very differently depending on who inherits them, which makes beneficiary planning especially important.
If you have an HSA, first – keep good records. It may be years or decades before you reimburse yourself. Second, think about it in the context of your estate plan; this is one account you don’t want to overlook.
Your Beneficiaries
If Your Spouse Is the Beneficiary
When an HSA passes to a surviving spouse, it’s one of the cleanest transfers available.
Your spouse essentially steps into your shoes:
- The HSA becomes their HSA
- The tax advantages stay intact
- The account can continue to be invested
- Funds can still be used tax-free for qualified medical expenses
From an estate-planning perspective, this makes HSAs incredibly spouse-friendly. Unlike many other assets, there’s no forced liquidation or immediate tax consequence.
If a Non-Spouse is Beneficiary (child, sibling, etc.):
- The account stops being an HSA at your death, and the fair market value is generally taxable income to them in that year.
- They can use the HSA to pay your final qualified medical bills incurred within one year of your death, which can reduce how much is taxable.
If No Beneficiary is Named:
- The HSA usually pays to your estate, and the value is included in income on your final tax return.
- That typically produces a worse tax result than having a clearly named spouse or individual beneficiary.
In other words, an HSA left to an adult child, sibling, or other heir can create a sudden – and often unexpected – tax bill.
What If Your Spouse Dies With an HSA?
If your spouse owns the HSA and names you as beneficiary, you step into their shoes as the new HSA owner. Even if you don’t currently have (or qualify for) a high-deductible health plan, you can still own and use that inherited HSA.
As surviving spouse/beneficiary:
- The account becomes “your” HSA; you can use it tax- and penalty-free for your own qualified healthcare costs.
- You can also pay any remaining medical bills from your spouse’s last year of life from that HSA, tax-free.
After a spouse’s death, HSAs deserve a closer look as part of your broader planning. If you’re likely to leave the account to non-spouse heirs someday, the HSA can actually become a “bad” asset for them, since it is fully taxable as income when they inherit it. Because of that, it often makes sense to use an inherited HSA more intentionally during your lifetime (covering qualified medical expenses or reimbursing yourself) rather than allowing a fully taxable account to pass on to your heirs later.
Should an HSA Be Spent Before Death?
Should an HSA be spent before death? Sometimes, yes – but only with intention. In certain situations, using HSA funds during your lifetime can reduce the risk of leaving behind a fully taxable asset for your heirs. This often becomes a consideration if you are single or widowed, facing declining health, or expect to leave your HSA to a non-spouse beneficiary.
In those cases, it may make sense to use the HSA strategically to cover qualified expenses such as:
- Current or previously incurred medical expenses
- Medicare premiums
- Dental, vision, or long-term care–related medical costs
The key point is that this isn’t an automatic decision. Whether or not to spend down an HSA before death depends on coordination with the rest of your financial and estate plan and on timing that aligns with your overall goals.
Why HSAs Deserve a Spot in Estate Conversations
HSAs deserve a seat at the table in estate planning conversations because they don’t behave like many other assets. Unlike IRAs, HSAs don’t follow trust instructions, and they don’t automatically lead to outcomes that feel “fair” among heirs. Instead, they follow beneficiary designation forms – period. That makes it especially important to review your HSA alongside the rest of your plan, including:
- Your estate planning documents
- Other accounts that pass by beneficiary designation
- Ongoing spousal planning conversations
Remember that estate planning isn’t just about wills and trusts – it’s about how all of your accounts work together. If you’re not sure how your HSA fits into your estate plan, we can help you review your beneficiaries, align your accounts, and make sure your plan reflects your real intentions. Schedule a conversation with Approach Retirement Advisors, and we’ll help you take a closer look.