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 beneath its slick user experience and terms of use, Robinhood beneficiary rules have some stark disadvantages when it comes 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 Robinhood beneficiary support is nonexistent. Instead, the company requires accounts to go through the estate process and have the funds distributed.

Robinhood does allow account owners to identify a “trusted contact person,” but this person does not have any claim as a beneficiary.

Similarly, Robinhood does not permit the creation of transfer-on-death accounts (TODs), joint accounts, or trust accounts. Each of these accounts—which are widely available through other trading companies and online platforms—designate a clear beneficiary in the event of the primary account holder’s death. 

Because Robinhood restricts account types, accounts go through probate upon the death of the owner. This process is time-intensive and a source of frustration for both estate owners and their beneficiaries

The Cost of Not Naming a Beneficiary

When account owners can’t name their Robinhood beneficiaries, assets can only be distributed after they pass through a lengthy probate process, during which a court oversees the dissolution of the account and the distribution of its funds to beneficiaries.

It’s important to note that these beneficiaries may not be the ones you would have chosen had you designated beneficiaries through your account or will. Your assets will also be documented in public records if you don’t have a will in place.

If your estate is subject to the estate tax, your assets are also subject to taxation—which could be avoided if Robinhood supported beneficiaries.

Wills Only Offer Limited Control Over Your Estate

When trading on Robinhood or similar platforms, a will is an essential safeguard to ensure your assets reach your desired beneficiaries. 

However, wills alone can’t compensate for the inability to name a beneficiary. Even with a will, funds held by these investment companies are still subject to probate and public records, and assets are withheld until the estate administration process is complete.

When assets held in a Robinhood account enter into the estate administration process, you provide the documentation and guidance needed to distribute these assets according to your wishes. But contrary to what many consumers believe, this document won’t circumvent probate, will leave your funds tied up for a significant period, and will still incur the costs of having your assets go through probate.

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 President and Chief Investment 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.