What happens to your HSA money when you die?
Dear Liz: What designation or instructions should I make for assets (if any) which remain in my health savings account at the time of my death? Do any remaining funds go directly to my estate or am I allowed to name a beneficiary for this money? If “yes†to the beneficiary question, is the beneficiary subject to the same 10-year payout requirement that applies to most other retirement account beneficiaries? I assume that if the funds go to my estate, the estate would pay tax on the funds given I’ve never paid tax on that money.
Answer: Yes, you can name beneficiaries for health savings accounts. But the tax advantages of these plans often disappear at death.
HSAs, which are paired with high deductible health insurance plans, are known for their rare triple tax benefit. Contributions are tax-deductible and balances can grow tax-deferred, while withdrawals for qualifying medical expenses can be tax free. HSAs don’t have the “use it or lose it†clause that applies to flexible spending accounts; balances can be rolled over from year to year and invested for growth.
What’s more, the withdrawals needn’t happen in the same year you incur the medical costs. As long as you keep good records of unreimbursed medical expenses, you can use them to justify tax-free withdrawals years or even decades in the future.
As a result, many people who can afford to pay medical expenses with other funds use their HSAs as a kind of supplemental retirement fund. There are no required minimum withdrawals, and it can be tempting to leave balances in an HSA as long as possible.
Your current and former spouses could be eligible for Social Security benefits, subject to certain requirements.
If you’re married and name your spouse as your beneficiary, that may not be a problem. Spouses who inherit HSAs can opt to treat the account as their own, which means they can make tax-free withdrawals to pay for qualified medical expenses.
Other beneficiaries, though, will be required to empty the accounts and pay income tax on the withdrawals. These withdrawals won’t be penalized, but they also can’t be delayed. By contrast, non-spouse beneficiaries typically have 10 years to empty most inherited retirement plan accounts.
If you don’t name a beneficiary, any remaining funds in the account will be paid to your estate and taxed on your final income tax return.
Home equity in community property states
Dear Liz: I live in California and have been married for 20 years. My spouse bought our home before our marriage and my name is not on the title as a co-owner. However, I contribute to most of our monthly financial obligations which include paying the mortgage, property taxes, etc. In the event of death or separation, how much of the current home equity am I entitled to? This is our only and primary residence.
Answer: Normally, an asset that was purchased before marriage is considered separate property even in community property states such as California. But if the mortgage is paid down with “community funds†— money earned by either spouse during the marriage — then the spouse who isn’t on the title may be entitled to some of the appreciation that occurs after the wedding.
That may not prevent you from being evicted if your spouse dies, however, or having to fight an expensive battle in court if you divorce. Consulting an attorney now could help you better prepare for either possibility.
Banks are offering all kinds of incentives to get your money. Here’s what to look for in the fine print.
Delayed Social Security benefits
Dear Liz: I know my spouse can get up to half of my Social Security benefit amount if it is greater than her benefit. I am planning to delay starting Social Security until age 70. Will my spouse get half of my benefit at my full retirement age (which is 66 and 2 months) or half of my (noticeably higher) benefit at age 70?
Answer: The former. Spousal benefits don’t earn the delayed retirement credits that will increase your own benefit by 8% annually between your full retirement age and age 70.
Survivor benefits are a different matter. Should you die first, your wife would be eligible for up to 100% of your benefit — including any delayed retirement credits you earned.
Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact†form at asklizweston.com.
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