What happens to my HSA funds if I die and I named the below person/entity as my beneficiary?
If your spouse is your beneficiary, there will be no tax implications when they receive your HSA. The HSA is transferred directly to your spouse. They can then continue using the HSA money for spending, saving or investing within the standard IRS guidelines for HSAs. It remains an HSA and the same tax-advantaged rules would continue to apply1.
If the beneficiary is not your Spouse, the HSA ends on the date of your death. The funds will be distributed and taxed as income to the beneficiary based on fair market value. However, the beneficiary can use the HSA funds to pay for medical expenses of the account holder for up to 12-months after their death2.
In certain states, your spouse's consent may be necessary if you wish to name a person as a beneficiary other than or in addition to a spouse. You should consult with your attorney before making this type of beneficiary designation.
If no beneficiary is listed or has predeceased you, the HSA will be distributed to your estate and taxed as income on your final income tax return.
1:IRC Sec. 223(f)(8)(A)
2:IRC Sec. 223(f)(8)(B)(i)