In general, an account holder may transfer all or part of their account to an immediate family member—free of tax—at any time, even upon death.
The recipient must:
- Be an immediate family member:
- Parent (Mother or Father),
- Spouse,
- Child (son or daughter),
- Be a resident of Montana,
- Receive the money in an already established MSA or create an MSA with the transferred fund, and
- Follow all the requirements of the program to keep all the tax benefits associated.
This transfer must take the form of a direct transfer. A direct transfer can be made using an electronic bank transfer or a check, not cash. Moreover, combining the MSA funds transferred with funds of a regular account will result in a loss of the tax benefits for the transferred funds.
Such transfer is classified as a gift for federal tax purposes, and is not required to be included in gross income. In this case, the ending balance of the MSA to be reported on Montana Form 2, Schedule MSA Schedule, line 5 will include the transfer.
When an MSA account is transferred to an immediate family member because of the death of the account holder, the recipient may retain the tax benefits of the account, provided the requirements listed above are met.
When the funds are transitioning through an estate of the deceased before being distributed, the transfer to this estate is free of tax. The MSA tax benefits are suspended. This means that the estate is not required to keep the funds in a separate account, and it cannot make any contributions. It can only make withdrawals to pay for medical bills incurred by the deceased within one year of the date of death. Any earnings received before the distribution to an immediate family member are taxable to the estate and must be reported accordingly.
The funds from an account of a deceased account holder that are distributed to an heir that is not an immediate family member, constitute a nonqualified withdrawal and this amount is recapturable on the return of the estate. However, the penalty for nonqualified withdrawal does not apply.
