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Retirement accounts are treated differently than other types of investments, for income tax purposes. In short, if you fail to name a beneficiary on a retirement account, the monies are then taxed all at once, at an estate income tax rate which is higher than the individual rates. Moreover, in order to have the monies paid to the estate, one would need to probate your will or otherwise administer your estate through a court process. So it really is imperative that one check their retirement accounts periodically to make sure one or more beneficiaries are listed.
Who should you list as a beneficiary? Generally, if you are married, naming your spouse is the best option, for income tax purposes, as your spouse can roll the monies over into his/her own account and not have to take more than the annual required minimum distribution. If you have an estate tax problem, naming a spouse may not be the best option. If naming someone other than a spouse, that person usually must take the monies out over ten years. When choosing beneficiaries, also be mindful that a person under the age of 18 can not legally inherit, so choosing a minor is not a good idea. Regardless, you may not want to have a young person inherit retirement monies if they are substantial, unless the monies go into a trust.
Having a trust or an estate as a beneficiary of retirement monies is also not usually a good idea, unless you follow certain IRS guidelines. The income tax consequences of doing so without following the special rules will result in a huge income tax liability. Sometimes a trust may be necessary, especially if there is an estate tax issue. In that situation, it would be best to seek the advice of a knowledgeable tax or estate planning attorney.
In conclusion, it is extremely important to name beneficiaries on retirement accounts and to consider the repercussions of who you name.