[Jaygray]

You can't assign TM to a folder. It insists on reading and writing to the root directory. However, this should not be a problem.

The TM backup is stored in a "sparsebundle", which basically shows up like a single folder in the root directory on the drive. As long as you leave this one item alone in the root directory, you can read and write freely. Whether TM creates the sparsebundle, or you create a folder for it, either way, it's doing the same thing, and it will appear basically the same in Finder. Don't worry about TM cluttering your Finder with hundreds of backup files. It only shows up as a single item, just like a folder would.

To summarize, everything you describe in the above post will happen automatically, with the exception of being able to rename the TM backup "Time Machine". It will be called "(name of your Mac + a few numbers + sparsebundle)"

Not sure what the OS X term for "root directory" is... (one parent level above the User folder)