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In Heat Signature, you can retire your character after a time. When you do so, you're given the opportunity to select an item to "pass on" to future characters. However, I have yet to see any of these items in subsequent characters.
How do I ever find the items I've passed on? If they aren't a guarantee to find, why retire a character at all?
Items you or your friends pass on can be found as loot in other ships, usually from crates. Whether you can make any significant changes to the overall loot quality is debatable (though everyone I know would have problems with this- some idiot keeps naming wrenches Wrenchy McWrenchface).
As mmathews' commented, the main reason to retire characters is to get rid of them once the penalties kick in. As characters become more famous, they become less effective at earning liberation progress. Once they've done their Personal Mission, you're often better off getting rid of them.
Inheriting items gives you a nice reminder of that character. It's fun to think "this isn't just an automatic shotgun- this is the shotgun Zero Gemini used to go on a rampage after he killed his wife by accident".
You can also inherit friends' items and they can inherit yours. You can have a lot of fun giving items funny names like Wrenchy McWrenchface and seeing your friends' reactions.
it seems to me these items appear much more on defector mission crates than on your actual characters gameplay - but when they do, it's nice.
I'd say retiring let's you add personal challenges to each new character - like having a self imposed "seen by = 0" on a character, regardless of the mission clause. After you've played it a while - you'll notice that characters have noi personal meaning - they're just different gear sets - so to me this helps adds flavor (currently about to retire who never killed Foundry enemy because I decided he was ex-foundry himself)
