IBA Compliance Connection

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A customer who named her husband as the beneficiary of her health savings account (HSA) prior to their divorce has died. The executor of the customer’s estate is claiming that the HSA belongs to the estate and not the beneficiary, since he is a former spouse. Is the executor correct?

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We do not have enough information to determine if the executor is correct, and due to the complexity of this issue (as discussed below), we recommend obtaining the advice of bank counsel or requesting that the executor provide a court order to your bank before you distribute the HSA.

If the HSA qualifies as a trust under Illinois’ trust laws, the judicial termination of marriage would have revoked the former spouse’s beneficiary designation — unless its terms expressly provided otherwise, or your customer re-designated her former spouse as the beneficiary after the divorce.

Both the new Illinois Trust Code (ITC) (effective January 1, 2020) and the Trusts and Dissolution of Marriage Act (TDMA) (scheduled to be repealed January 1, 2020) state that unless a judicial termination of marriage expressly provides otherwise, the judicial termination of the settlor’s marriage revokes every revocable provision pertaining to the settlor’s former spouse in the trust instrument or amendment signed by the settlor prior to the termination of the marriage. The ITC defines a trust as “a trust created by will, deed, agreement, declaration, or other written instrument” and the TDMA defines a trust as “a trust created by a nontestamentary instrument.” (However, note that the ITC and TDMA are not applicable to certain forms of excluded trusts, such as “instrument[s] under which a nominee, custodian for property, or paying or receiving agent is appointed.”)

The FDIC describes HSAs as “tax-exempt trust[s] or . . . custodial account[s]” and includes HSAs with designated beneficiaries in its “revocable trust category” for deposit insurance purposes. We are not aware of any Illinois case law that addresses whether the TDMA is applicable to HSAs; however, we are aware of at least one Illinois court that held that a decedent’s pre-divorce designation of his wife as the beneficiary of his IRA was revoked by the TDMA when the judicial termination of marriage was entered. (Although the decedent’s former spouse argued that the IRA was a custodial account subject to one of the exclusions under the TDMA, the court conducted a detailed analysis to determine that the IRA account did not function as a custodial account and was subject to the revocation provisions of the TDMA.)

We also are aware of an Illinois circuit court that found that a decedent’s 401(k) plan was a trust subject to the TDMA, although the appellate court declined to decide this question since the language of the parties’ divorce decree waived the former spouse’s interest in the 401(k).

Thus, whether your deceased customer’s HSA should be paid to her estate or her former spouse is a complex legal question that requires an analysis of the nature of HSA and the language in the judicial termination of marriage. Consequently, we recommend consulting your legal counsel regarding this matter or requesting that the executor provide you with direction from the court as to the distribution of the HSA.

For resources related to our guidance, please see:

  • Illinois Trust Code, 760 ILCS 3/605(b) (effective January 1, 2020) (“Unless the trust instrument or the judgment of judicial termination of marriage expressly provides otherwise, judicial termination of marriage of the settlor of a trust revokes every provision that is revocable by the settlor pertaining to the settlor's former spouse in a trust instrument or amendment executed by the settlor before the entry of the judgment of judicial termination of marriage of the settlor and any such trust shall be administered and construed as if the settlor's former spouse had died upon entry of the judgment of judicial termination of marriage.”)
  • Trusts and Dissolution of Marriage Act, 760 ILCS 35/1(a) (scheduled to be repealed January 1, 2020) (“Unless the governing instrument or the judgment of judicial termination of marriage expressly provides otherwise, judicial termination of the marriage of the settlor of a trust revokes every provision which is revocable by the settlor pertaining to the settlor's former spouse in a trust instrument or amendment thereto executed by the settlor before the entry of the judgment of judicial termination of the settlor's marriage, and any such trust shall be administered and construed as if the settlor's former spouse had died upon entry of the judgment of judicial termination of the settlor's marriage.”)
  • Illinois Trust Code, 760 ILCS 3/103(37) (effective January 1, 2020) (“‘Trust’ means a trust created by will, deed, agreement, declaration, or other written instrument.”)
  • Illinois Trust Code, 760 ILCS 3/102 (effective January 1, 2020) (“Except as otherwise provided, this Code applies to express trusts, charitable or noncharitable, and trusts created pursuant to a statute, judgment, or decree that requires the trust to be administered in the manner of an express trust. This Code does not apply to any: (1) land trust; (2) voting trust; (3) security instrument such as a trust deed or mortgage; (4) liquidation trust; (5) escrow; (6) instrument under which a nominee, custodian for property, or paying or receiving agent is appointed; (7) trust created by a deposit arrangement in a banking or savings institution, commonly known as a “Totten trust” unless in the trust instrument any of the provisions of this Code are made applicable by specific reference; or (8) Grain Indemnity Trust Account or any other trust created under the Grain Code.”)
  • Trusts and Dissolution of Marriage Act, 760 ILCS 35/1(c) (scheduled to be repealed January 1, 2020)  (“‘Trust’ means a trust created by a nontestamentary instrument executed after the effective date of this Act, except that, unless in the governing instrument the provisions of this Act are made applicable by specific reference, the provisions of this Act do not apply to any (a) land trust; (b) voting trust; (c) security instrument such as a trust deed or mortgage; (d) liquidation trust; (e) escrow; (f) instrument under which a nominee, custodian for property or paying or receiving agent is appointed; or (g) trust created by a deposit arrangement in a bank or savings institution, commonly known as ‘Totten Trust’.”)
  • Financial Institution Employee’s Guide to Deposit Insurance (Health Savings Accounts) (“A Health Savings Account (‘HAS’) is a tax-exempt trust or custodial account established with a qualified HSA trustee, such as an IDI, to pay or reimburse certain medical expenses. . . . The FDIC does not recognize HSAs as a unique deposit insurance category. HSAs are insured based on who owns the funds and whether beneficiaries are named in the IDI account records. These accounts could be insured under one of the following deposit insurance categories: 1. Revocable trust category 2. Single account category.”)
  • Financial Institution Employee’s Guide to Deposit Insurance (Health Savings Accounts) (“In order to identify the applicable deposit insurance category for an HSA, the FDIC will determine whether the deposit has testamentary language identifying one or more eligible beneficiaries to receive the HSA deposit funds when the owner dies. If valid testamentary language exists with one or more beneficiaries named, then the FDIC will insure the deposit under the revocable trust account category.”)
  • In re Estate of Davis, 589 N.E.2d 154, 157 (2nd Dist. 1992) (“By the plain language of the statute, unless the trust agreement as the ‘governing instrument’ or the parties' property settlement agreement expressly provided that section 1 would not apply or unless the decedent redesignated Carol after their divorce in a written beneficiary designation subsequent to the divorce as required by the terms of the trust agreement, the decedent's predissolution designation of Carol as the  beneficiary of IRA No. 5013 was revoked by operation of section 1 at the time his marriage to Carol was judicially terminated.”)
  • In re Estate of Davis, 589 N.E.2d 154, 162 (2nd Dist. 1992) (“In contrast to the custodial account IRA in Philp, the IRA at bar was established as a trust under a trust agreement. In order to find there is a valid express trust, these conditions must be present: an intent to create a trust which may be shown by a declaration of trust by the settlor or circumstances which show the settlor intended to create a trust; a definite trust res; ascertainable beneficiaries; a trustee; specification of the purpose of the trust and how it is to be performed; and delivery of the trust property to the trustee.”)
  • Herbert v. Cunningham, 2018 IL App (1st) 172135, ¶ 24 (“Next, the circuit court agreed with the executor's contention that the TDMA automatically revoked Betty's beneficial interest. The court found that the ‘401(k) plan documents make clear that the 401(k) in this case is a trust’ that was governed by the TDMA. The court concluded that, under section 35/1 of the TDMA (760 ILCS 35/1 (West 2016)) Betty's interest in the 401(k) ‘was automatically extinguished upon entry of the Divorce Decree.’”)
  • Herbert v. Cunningham, 2018 IL App (1st) 172135, ¶ 38 (“Further, we need not decide whether the TDMA applies to the 401(k) account at issue in this case. This is because the circuit court additionally determined that—wholly apart from operation of the TDMA—the terms of the divorce decree waived Betty's interest in the 401(k). As set forth below, we agree with the circuit court's conclusion on that issue, which independently supports its judgment in favor of the executor.”)