One of the really amazing things about retirement accounts is that you can name any beneficiary you want for the account and that person or trust or organization gets the money after you pass, no matter what. Retirement accounts are not controlled by the probate process and your will. If properly managed, this can work great; if not, it can be a disaster. It largely depends on whether your beneficiary designations are up-to-date. The two most common places people want their money to go are, of course, to their kids and family or to a charity.

You need to put some deliberate thought into choosing the person or organization you write on the beneficiary form for your retirement accounts. Remember these basic facts about retirement accounts as you mull your decision:

The first fact, that your retirement accounts are part of your estate and might be taxed, can be confusing. Right now the estate tax only affects about 2 percent of the people who die each year. In 2010, the federal estate tax is scheduled to be repealed, and then in 2011 it may be back, depending on what Congress decides to do about the tax laws. Your state may or may not have its own estate tax, too. (You can check with your state’s department of revenue website to find out.) The important thing to remember when you’re planning your estate and considering your retirement accounts is what the total of your other assets are and whether paying estate taxes will prevent your beneficiaries from getting the full benefit of inheriting your accounts.

Three good ways to protect your retirement accounts from estate taxes are:

It’s important to review your estate’s potential estate tax liability with your lawyer. Don’t worry that the solution to save estate taxes will necessarily need to be an expensive one; it doesn’t have to be. If you’re young with a family, you should have enough inexpensive, term life insurance so your spouse or your children’s guardian has enough cash to deal with any taxes without touching the retirement accounts. Your lawyer might suggest a trust to own the life insurance instead of you or your spouse to reduce the effect of the insurance on the estate tax. If you’re older, you can leave a little money to charity directly in your will or through a trust to reduce the estate tax amount if your estate is taxable and you’re concerned about the amount your kids get or the amount the government would tax.

Since the estate tax is related to how much money you have in your own name when you die, an inexpensive strategy your lawyer may suggest is to balance your total assets equally between you and your spouse by transferring nonretirement account assets between you. Remember, retirement accounts can’t be shared, but as a married couple you can transfer nonretirement assets like brokerage or checking accounts or your home between you without paying tax. If one person has more in their retirement accounts than the other, lawyers will often have the spouse with the lower account balances own the house and most of the nonretirement accounts to make the value of what both spouses own equal. This can reduce the potential estate tax liability. Spouses in second marriages are sometimes uncomfortable with mixing accounts like this because under this plan the money they brought into the marriage could end up in their new spouse’s account. Be sure you understand your lawyer’s advice before making any changes to your accounts. Whatever they advise you to do, know that there are usually fairly inexpensive solutions to most estate tax problems.

Whatever you decide to do with your estate plan, you need to communicate your strategy to your family. If you’re married, obviously your spouse will be in on your plans because you’ll make them together, but many people neglect to tell their kids or other affected relatives what they have in mind. No, you don’t need to go into every little detail with them. But check in on the basics, especially if your family is grown, because what you decide to do might affect their planning as well.

There may be details you don’t want to get into now with your beneficiaries for various reasons, so leave that information in a letter. A simple letter, separate from your will so that it can remain private, is the perfect way to explain to your family what you had in mind when you set up your accounts and your estate the way you did, and it can avoid hurt feelings and family dissension later.

One of the really useful provisions of the tax law is that you can leave your IRA to your kids and they can take withdrawals over their lifetime. If your account is held with a trustee that allows it—most of them do nowadays, but it’s worth double-checking the account agreement to make sure—your kids can inherit the IRA and then transfer the funds into an account that is still in your name but is now registered as a beneficiary account for their benefit. Minimum withdrawals are required, but they can be made over the child’s longer life expectancy—extending the time the money stays tax-deferred.

A good way to avoid problems that can result when beneficiaries argue with each other about how to divide your bequest is to separate your IRA accounts so that each child is the beneficiary of an account. This is a little more work to manage, especially if it creates IRA accounts that are small and unwieldy to rebalance or that incur fees. If that’s the case, this strategy may be practical only if you’re retired and have a larger balance to work with. While you’re young, you might just leave the kids as equal beneficiaries of the account and opt for easier management.

Beneficiaries can sometimes be mesmerized by the appeal of a bequest and start making lavish spending plans. If you’re worried about your kids messing up the stretch IRA strategy by withdrawing more than the minimum required, or worse yet the whole balance, you can name a trust as the beneficiary. The trust must qualify as what’s called a see-through trust. This means that, among other things, the beneficiaries are specifically named, and the trust becomes irrevocable upon your death, at which point the trustee can continue the stretch IRA for you. This would be a good strategy for a child who is permanently disabled, enabling the trustee to manage his disability benefits relative to the IRA withdrawals.

The stretch IRA works for Roth IRAs, too, but doesn’t work for many employer plans. Employers, or at least the trustees managing their plans, often don’t want the hassle of managing beneficiary withdrawals over a long period of time. Their plan documents often dictate that distributions to heirs be made within five years. This is yet one more good reason to roll over your accounts to an IRA when you retire or leave a job.

If you’d like to leave money to a charity, whether you’re doing it as a tax break for your estate or from a moral commitment to a philanthropic cause, IRAs are good assets to give because the charity can receive them tax-free. Donating the IRA achieves your goal of supporting the charity, gets the estate the tax break, and leaves other assets you may have, like real estate or taxable investments, that would be less expensive for other family members to inherit.

If you’re over age 70½ and are taking your required minimum distributions (RMD) from your IRA accounts, segregate the amount for the charity into a separate IRA from the amount you want to leave to a family member or friend. Beneficiaries have to continue the RMDs the original account holder started, based on the life expectancy of the oldest beneficiary. Charities don’t have a life expectancy, so the IRS dictates that proceeds must be withdrawn fully within five years. Having a charity mixed in with the other heirs on the same account would limit the number of years the beneficiaries could stretch the IRA withdrawals to five years.