This blog was updated in August 2022 for relevance.

Free-trading apps, such as Robinhood, have attracted massive user bases with their limited fees, mobile-based trading, and other flexible features that improve consumer access to investing tools and platforms.

With more than 18 million funded accounts on its platform, Robinhood is one of the largest disruptors in the stock trading market. But for the last 9 years, Robinhood beneficiary rules had some stark disadvantages when it came to managing invested assets after the death of the account owner.

How Robinhood Handles Account Owner Deaths

It’s standard for traditional investment companies to allow account owners to designate beneficiaries for their accounts, but until May 2022 Robinhood beneficiary support was non-existent. Instead, the company required accounts to go through the estate process and have the funds distributed.

Now 9 years later, Robinhood has finally added beneficiary support to their accounts for everyone except those who live in Louisiana (sorry Louisiana, you have unique probate laws.) This change is big, as establishing a beneficiary could help your account avoid probate.

Even with this change there are still some things to watch for.

Transfer on Death

Robinhood uses transfer on death (TOD), which means when you die whoever you’ve designated will end up inheriting the account. Even if your will says otherwise, the TOD designation will supersede it. Needless to say, you’ll want to make sure you intend for this person to inherit your account if you pass.

Since Robinhood went almost an entire decade with no beneficiary option, it’s imperative that users navigate to their account settings and update the beneficiary section immediately. Remember, you can change the beneficiary information at any time and it’s a good rule of thumb to check and update information yearly or following a life event.

Beneficiary Designations

Robinhood allows you to set up to 10 beneficiaries in your account settings, but it currently does not allow you to specify how much each person gets. This means the investments will be evenly split, and there’s no way to change that. So if you want your wife to get 50% and your two kids to get 25%, well that’s not possible.

Robinhood also doesn’t allow you to name minors as a beneficiary. They have to be over 18 and a US citizen or Resident.  Other financial institutions allow you to do this, although you’ll probably be advised to specify an adult as a custodian on the account to make decisions for your child reaches age of majority (18).

There are 9 community property states, Alaska, Arizona, California, Idaho, Nevada, New Mexico, Texas, Washington, Wisconsin. If you’re married and live in any of those states you’ll need to get consent from your spouse to designate someone else as beneficiary.

Invested in crypto? Crypto assets are not covered with the Robinhood beneficiary designation process. These assets will have to go through the probate process.

Always Check The Rules of Your Investing Service or Platform

Some investors—such as young investors not thinking about estate planning or investors that only keep a small portion of their assets in a Robinhood account—might not be concerned about the aforementioned limitations of Robinhood. 

But even if the limitations of Robinhood beneficiary rules aren’t enough to dissuade you from this or a similar trading platform, it’s still important to understand them when it comes to dissolving accounts and managing your estate.

If you continue to use investing apps like Robinhood, be aware of the drawbacks that come with them and take appropriate steps to ensure your assets are distributed to your beneficiaries. 

If you aren’t comfortable with these limitations in protecting and managing your estate, seek out an investment management company that supports beneficiaries and can structure financial plans to reduce your estate administration costs.

Ready to connect with an investment management company that can optimize your estate planning process? Book a meeting with one of our experts today.

Jeremy Lau

Jeremy L. Lau serves as Chief Executive Officer. He teaches the Investment Management course for California State University, Fullerton’s Trustee Certification Program and frequently speaks on fiduciary investing to attorneys and fiduciaries across various associations. Before joining Prudent Investors, he worked as an Executive Director in investment banking in Tokyo and Hong Kong for Deutsche Bank AG and UBS AG in structured credit and convertible bonds. He graduated in Accounting (with Honors distinction) from Brigham Young University and has earned the right to use the Chartered Financial Analyst (CFA®) and Certified Financial Planner (CFP®) designations.