Yes, it can be confusing, but the directions are correct.
Basically, the value of an HSA that is inherited is taxable to the inheritor in the year of death of the original HSA owner...EXCEPT if the person who inherits is the spousal beneficiary. In this case, the spouse just takes over the HSA as if it is his or her own - no tax consequence here.
"Yes" means that the HSA was inherited from a non-spousal source (or from the spouse but where the taxpayer was not listed as the beneficiary) and is to be taxed; a "no" means that the taxpayer is a spousal beneficiary who is just going to take over the HSA without any tax consequence - or the HSA wasn't inherited at all.
The question could have been "Did Sanket inherit this HSA from any one other than his/her spouse or did Sanket inherit the HSA from his/her spouse when he/she wasn't listed as the spousal beneficiary?" but I am not sure that would help.
