In the financial community, this has been a topic of an ongoing debate between estate planning attorneys and financial advisors. For retirement accounts, investors are given the opportunity to name both primary and contingent beneficiaries – that is, the person or entity who will inherit the account to upon the original owner's death. Since qualified retirement plans (such as a 401(k) or 403(b), an IRA or a Roth IRA) pass by way of contract directly to a named beneficiary, the often-lengthy probate process, attorneys' fees and other costs associated with wills and settling estates are avoided.

Naming a trust as beneficiary is advantageous if your beneficiaries are minors, require special needs or just simply can't be trusted with a large sum of money. Some attorneys will recommend a special trust be established as the IRA beneficiary to avoid its assets becoming part of a surviving spouse's estate in an effort to avoid future estate tax issues.

The primary disadvantage of naming a trust as beneficiary is that the retirement plan assets will be subjected to required minimum distribution (RMD) payouts, which are calculated based on the life expectancy of the oldest beneficiary. If there's only one, it doesn't matter, but it can be problematic if there are several heirs of varying ages: The ability to maximize the deferral potential of the qualified plan interest is lost under this approach. In contrast, naming individual beneficiaries will allow each beneficiary to take an RMD based on their life expectancy, which can stretch an IRA's earnings out for a longer period of time.

While the IRA owner is alive, only the IRA owner can change the designated beneficiary of the IRA. Exceptions may apply if there is an attorney-in-fact, in which a power of attorney includes provisions that appoint that agent to act on the IRA owner's behalf. Similar exceptions apply to conservators, who can be appointed by a court to take care of legal matters for an IRA owner who is unable to do so.

After the IRA owner's death, the designated beneficiary, including a trust beneficiary, has the option of disclaiming the inherited assets. If the disclaimer is qualified, the assets will generally pass to the contingent beneficiary. If there is no other primary or contingent beneficiaries, the beneficiary will be determined according to the default provisions of the IRA plan document.