After a home, a car is often the second most valuable asset a person owns.
Leasing is quite common, considering about 15–20% of new vehicles are leased rather than purchased outright. Leasing is an alternative because it often allows the lessee (the person leasing the vehicle) to drive a more expensive car for a lower monthly payment during its most reliable years. At the end of the lease, the lessee can return the car and look at new options.
However, a lessee does not actually own the vehicle. Instead, they drive it under a car lease agreement, which is a binding contract. Because of this, the terms of a lease can have implications for an estate plan, so it’s important for lessees to understand the fine print of their contract and know what happens to the lease if they pass away.
How a Lease Operates
In a lease, the buyer and dealer agree on a term and monthly payment, which is based on the expected depreciation of the vehicle over that period. Instead of paying an interest rate, the lessee pays a “money factor,” which represents the cost the lessor paid to purchase the vehicle.
Lease terms generally range from 24 to 60 months. At the end of the term, the vehicle is returned to the dealer. While lessees don’t build equity in the vehicle like buyers do, if the car’s value exceeds the residual value stated in the lease, the lessee may have a positive trade-in value.
Ending a lease early usually triggers termination fees and penalties. However, when the supply of used cars is low or a particular model is very popular, dealers may allow lessees to exit their lease early. It also may be possible, in some instances, to transfer your lease to someone else.
What Happens to a Lease When the Lessee Passes Away?
What happens to a leased vehicle after the lessee’s passing depends on the terms of the lease, which will be stipulated in the contract.
- Early Termination Death Clause
The lessee’s passing does not automatically terminate the lease unless there’s a provision allowing for early termination due to passing. Even if the lease includes such a clause, it may require a dealer fee and the return of the vehicle. The estate may also need to provide a death certificate to prove the lessee has passed away. If the lessee had fallen behind on payments, the dealer could repossess the vehicle and require the estate to pay off the remaining balance. If the lease is current, the dealer may allow an estate representative to transfer the lease to another party, such as a family member. Ultimately, this will depend on the terms of the contract. - Standard Early Termination
Ending a lease early, whether due to passing or other circumstances, could trigger early termination provisions in the contract. This may result in the entire balance of the lease becoming due, early termination fees, the return of the vehicle, and the payment of a disposition fee. These costs are typically paid from the estate. - Options with a Colessee
Since a lessee doesn’t own the vehicle, they cannot leave it to a beneficiary in their estate. However, there may be a coborrower or colessee on the contract. If there is a cosigner, that person usually assumes responsibility for the remaining payments after the lessee’s passing. The colessee can then decide whether to keep the vehicle or seek a lease transfer partner. Some contracts, however, prohibit lease transfers or have restrictions, such as only allowing transfers after a specific period. Certain brands and dealers offer contingencies for colessees if one of the lessees passes away. For example, Ford’s “Peace of Mind Program” allows a surviving colessee to continue the lease, pay off the balance, or return the vehicle within 60 days without any further obligations. Once the lease is signed, a colessee usually cannot be added. However, lessees can take steps in advance to make estate administration easier. For instance, someone with a terminal illness might terminate or transfer their lease early to avoid complications in their estate.
A Car Lease Could Be Overlooked in an Estate Plan
Since lessees do not own their vehicles, a leased car might receive little attention in an estate plan.
Regardless, the estate will have to deal with the outstanding lease, unless there is a cosigner. The resolution options will depend on the contract and the dealership’s willingness to negotiate.
Before contacting the dealer after a lessee’s passing, the estate representative may want to consult with an attorney to review the lease. An attorney can explain how to legally terminate or transfer the lease based on the contract terms.
Our attorneys provide sensitive, accurate, and effective assistance with estate planning matters and can help individuals create a plan or assist estate representatives. To schedule a consultation, please call or contact us.
