It isn’t enough to set up retirement accounts and build your assets. You have to set up beneficiaries who will take charge of your funds after you are gone. A designated beneficiary is the person who decides how long your retirement plan can remain as a tax-deferred account.
This is a time when you will have to name a specific individual. You can’t name an estate or a charity. Spouses, children, close relatives or some trusts can be named your designated beneficiary, but if you are not choosing a specific person you will need to be very cautious.
Essentially, the designated beneficiary is the individual who will inherit the balance of the retirement account. By setting up specific beneficiaries the account holder prevents their IRA from going through probate or other legal manipulations when it is time to settle the estate.
In the case of a spouse it is simple to transfer IRA funds. The account is put into their name and they can treat it as their own. When the designated beneficiary is not a spouse, or there are multiple beneficiaries, the account may sit for up to five years before it is completely depleted. Alternatively, funds can be paid out, starting in the year following the death. This extends the tax shelter for the longest possible time.
A word of warning: if you do not take the time to set up a designated beneficiary then any IRA which lacks such an individual will be lumped into your estate. This means it is subject to probate.