Retirement fund assets go directly to the beneficiary named on the account. In most cases, the beneficiary should be named individuals, but sometimes a trust or a charity is an appropriate beneficiary. Using the beneficiary option allows the proceeds to bypass probate court. The beneficiary, if a married qualified retirement plan participant does not specify otherwise, defaults to the spouse. That is appropriate in many, but not all, family situations. Furthermore, the spouse would have to consent in writing in order for the plan proceeds to be payable to anyone else.

If the plan participant or individual retirement account (IRA) owner has no spouse at the time of death and has not chosen any other beneficiary, the retirement funds will probably be made payable to his or her probate estate. Rarely is this a good idea, whether it occurs by default or by the deliberate selection of "my estate" as beneficiary. Retirement money payable to the estate would then be treated like any other account: subject to creditors and distributed according to the decedent's will, or state law if there is no will. Retirement assets paid to one's estate lose two advantages of these funds: probate avoidance and income tax deferral. Therefore, it is important to name both primary and secondary (alternate) beneficiaries.

Qualified retirement plan participants and IRA owners in community property states should remember in their planning that community property rules apply to retirement assets. A spouse has a 50 percent interest in money earned by the other spouse during the marriage, including one half of the increase in retirement plans and accounts.

For many older people, their retirement plans and IRAs are their largest assets. For many of these people, what is left upon death is the main source of the legacy they would like to leave. It is, therefore, important to give some thought to beneficiary designations and planning for distributions before and after one dies.