Considerations for HSA or MSA Beneficiaries

When setting up a trust, there are many things to fund into the trust itself. Properties, bonds, stocks, securities, artwork, real estate, jewelry, and so on. However, there are also a few things that you may not want to fund into your trust. There are many things to look at when choosing HSA and MSA beneficiaries that will be talked about below.

Certain accounts and assets that can have assigned HSA and MSA beneficiaries are sometimes best not funded into a trust, because with a single document, you can automatically transfer the contents of the account or the asset itself to a beneficiary of your choice, bypassing probate. At times, doing so may, however, incur specific tax costs. Whether you should fund accounts into your trust or directly towards a person’s own wealth through a beneficiary designation depends on several circumstances.

Among these accounts and assets are health and medical savings accounts (HSA & MSA), both of which are tax deductive savings accounts that confer the benefit of providing you with accessible funds for most health expenses, without tax costs.

What Is an HSA/MSA?

Medical savings accounts and health savings accounts can provide you with an option to avoid a wide breadth of tax costs, however, setting them up involves more than simply petitioning for an account. To qualify for an MSA or an HSA, you need a high-deductible health care plan. According to the IRS, a high-deductible health care plan (HDHP) is defined as a plan with “an out-of-pocket maximum of $6,650, and a minimum deductible of $1,350”. For family plans, the maximum expense limit is $13,300, while the deductible minimum is $2,700. These are the numbers for 2018, but they change every year. For 2019, for example, the out-of-pocket maximums are increased by $100 and $200 for individual and family plans respectively, and the minimum deductibles are unchanged.

Although both medical savings accounts and health savings accounts are similar, they do have some distinct differences, based mostly on the nature of your health care and your employment situation.

If you wish to set up a medical savings account, you also need to be an employee of a company that employs 50 or fewer people or be married to such an employee. Alternatively, you need to be self-employed, or married to someone who is self-employed. If you are the employee of a larger company, you must set up an HSA. A health savings account

With a health savings account, you have the unique option of receiving (and making) contributions, often from your employer as a work incentive or a gift. The limit for these contributions is $3,450 in 2018, if you have single medical coverage. For those in a family medical plan, it is $6,900. If you are older than 55, it is an additional $1,000 to either of those limits. For an MSA, the contribution limit is 65 percent of the individual’s health plan deductibles, and 75 percent for a family’s plan.

MSAs were launched before HSAs, and have become largely obsolete since then – however, in California, contributions to an MSA are state-deductible, while contributions to an HSA are not.

The Value of HSA or MSA Beneficiaries

If you simply choose to utilize your HSA and MSA beneficiaries within your lifetime for tax deduction purposes, then any money left in these sorts of accounts upon your death will automatically be added to your estate. This money will go through probate, and subsequently pass through the inheritance process. This goes towards your estate’s total dollar value, which, if it exceeds the federal tax exemption limit of $11.2 million for an individual, or $22.4 million for the estate of a married couple (wherein they share the same limit), invokes a tax cost. Note that exceeding your gift tax exemption may cut into your estate tax exemption.

The state of California does not have inheritance tax costs or state estate tax costs, but other states do, further cutting into the value of the account.

By choosing HSA and MSA beneficiaries, you bypass probate entirely, and the money in the account is not added to the total value of your estate, instead transferring directly to your beneficiary when you die.

However, choosing a beneficiary is not necessarily straightforward – there are several considerations to make before you make your choice. Here is what you need to know.

If You’re Married

If you have a spouse, then the clearest choice for HSA and MSA beneficiaries is your spouse. Not only do spouses have an unlimited marital deduction on estate taxes, but you can contribute to their health care after you pass away by funding their own health savings account. Subsequently, your spouse can pass on whatever is left to your children when he or she passes away.

However, there are some considerations to make. If your estate is nontaxable – meaning, it does not meet the estate tax exemption limit – then it is wiser to elect your spouse as a beneficiary, allowing you to avoid counting the balance of the account as part of your final income tax return. Your spouse can elect to integrate the account into their own or take the money

On a taxable estate, consider funding the account into your living trust. Doing so will mean including the account in your final income tax return, however it also means you can ensure that your estate tax exemption is used to fund your AB trusts.

AB trusts exist to minimize estate taxes – these are two trusts, separately created, as a system. The A trust is the survivor’s trust, and the B trust is the decedent’s trust.

If you die and your estate is taxable, then the taxable portion of your estate will be taxed at up to 40% (at estate tax rates). Through AB trusts, the non-taxable portion of the trust goes into the B trust, while the taxable portion goes straight to the surviving spouse into an A trust, bypassing taxes due to the unlimited marital exemption. This way, the surviving spouse has access to the contents of both trusts, albeit in a limited form, but enough to continue to live on the property contained in the trusts.

If You’re in Your Second or Later Marriage

If this is not your first marriage, or you do not want to fund your account into your spouse’s account, then you can bypass your spouse and choose non-spouse HSA and MSA beneficiaries. The value of the account will have to be included in their taxable income.

If You’re Single

If you are single, then you can either fund the account into your trust, or anyone else. If your chosen beneficiary is a minor, it would be best to fund the contents of the account into the trust anyway, to ensure that if you pass away before your beneficiary comes of age, the account does not go into the hands of a guardian on behalf of said minor, especially a court-supervised guardian.

You can go over your options with an attorney and an estate planning professional. A trust is a great way to avoid probate with most of your assets and belongings, but just as the specifics and nuances of a trust should be discussed with a professional, it is best to go over your beneficiaries with a local estate planning professional as well.

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