Most people think of a health savings account as the one corner of their finances that never gets taxed. Contributions go in untaxed, growth is untaxed, and qualified medical spending comes out untaxed. It's about as close to a free lunch as the tax code offers. Then the owner dies, and the free lunch can turn into a bill for someone who never ordered it.

The account didn't change. The person standing next to it did.

The account most founders forget they have

Solo founders often end up with an HSA by accident. You picked a high-deductible health plan because the premiums were lower. Someone told you the HSA was worth opening. You set up a monthly transfer and forgot about it.

Years later it may hold tens of thousands of dollars, invested in funds you haven't looked at in a long time. It sits at a custodian your family has never heard of. It doesn't show up in your will, and it isn't part of your business. It's easy to miss in a binder, because it isn't a bank account, a retirement plan, or a company asset. It's a health account that happens to be a very good investment account.

The beneficiary form you filled out when you opened it is probably still the only instruction the custodian will follow. If you skipped the field because you were rushing, that matters too.

How an HSA is treated after you die

An HSA is a contract between you and a custodian. Like a life insurance policy or an IRA, it passes by beneficiary designation, not by your will. Under IRS rules (the guidance is in Publication 969), what happens next depends on who is named.

A surviving spouse as beneficiary. The HSA is treated as the spouse's own HSA. It keeps its tax advantages, and the spouse can keep using it for qualified medical expenses. Nothing is taxed because of the death.

Anyone other than a spouse. The account stops being an HSA on the date of death. The fair market value becomes taxable income to the beneficiary for that year. That beneficiary can reduce the amount by qualified medical expenses of the deceased that they pay within one year of death, but the rest is ordinary income.

The estate, or no valid beneficiary. The value is included on your final income tax return. The money then flows through the estate, which means it may be tied up in probate and exposed to creditors in a way a named beneficiary's share wouldn't be.

A daughter you name as beneficiary can receive a $40,000 HSA and owe income tax on it at her own rate. If she's in her peak earning years, that's a painful addition to the tax year in which she's also grieving and handling paperwork.

There's no 10-year stretch and no rollover for her. The special treatment ends when it leaves a spouse's hands.

Why self-employed founders get this wrong

Three patterns come up again and again.

The form was never completed. Opening an HSA online often lets you skip the beneficiary step, or you filled it in and the custodian never confirmed it. Without a beneficiary, the custodian's default rules or your estate apply.

The form is out of date. A founder who opened the account at 28 might still have a parent listed, or an ex. Beneficiary designations don't update when your life does.

The account moved. Many employers switch HSA custodians, and founders who once worked salaried jobs may have an old HSA at a former employer's provider. They may also have two or three accounts scattered across providers, each with its own form.

These are small administrative gaps. They're also exactly the kind that cost the most because nobody notices them until the person who could fix them is gone.

The real decision: who should be named, and in what order

For a married founder, naming your spouse as primary beneficiary is usually the cleanest result because it preserves the tax treatment completely. The real question is the contingent: who gets the account if your spouse dies first or at the same time?

For unmarried founders, or anyone whose primary beneficiary isn't a spouse, you're choosing a person who will face a tax bill alongside the inheritance. Some people accept that tradeoff. Others decide to direct the HSA to someone in a lower tax bracket, or to leave larger tax-free assets to the person who would pay the most tax on this one.

Split designations are possible too, with percentages divided among several people. That's useful when you want to share the money, but it also divides the tax among them, so each beneficiary should know what they're stepping into.

This is a place where a short conversation with a CPA is worth the cost. Rules around dependents, medical expense offsets, and state taxes vary, and I'm not giving you tax advice here. I'm pointing out that this decision has consequences most people never examine.

Your next moves

  • Log in to your HSA custodian today and open the beneficiary page. Don't assume it's right. Read the names on screen and check whether they still reflect your life.
  • Find every HSA you've ever had. Search your email for "HSA" and "health savings account," and check old employer benefit portals. Write down each custodian and an approximate balance.
  • Name a primary and a contingent beneficiary on each account. A contingent beneficiary is the part people skip, and it's what keeps the account out of probate if your first choice can't inherit.
  • Ask your CPA one question: "If my primary beneficiary isn't my spouse, what will they owe on this account, and is there a better way to direct it?" Take notes.
  • Put the custodian name, account location, and login recovery steps in your letter of instruction. Your beneficiary needs to know the account exists before they can claim it. Tell them it exists and what to ask the custodian for.

What this has in common with the rest of your estate

The HSA isn't unusual. It's one example of a general rule for founders: the money that moves by form, not by will, is where the quiet failures live. Life insurance, retirement accounts, HSAs, payable-on-death bank accounts, and transfer-on-death brokerage accounts each have their own designation, their own custodian, and their own tax consequences.

No single document gathers them. That is the reason they go stale.

Heirloom exists for that gap. It's built to hold the whole picture for a solo founder: the vault of accounts and access, the handoff instructions, and a record of who is named where, so a forgotten HSA doesn't become a surprise tax bill for the person you meant to help. If you'd like a place to list every account with its beneficiary and check it against your actual wishes, you can see how it works at heirloom.lumenlabs.works. Start with the HSA, though. It takes ten minutes.