After a house, a car is often the second-most valuable piece of property a person owns. About 15–20 percent of new vehicles are leased rather than purchased and financed. Leasing is a popular alternative to traditional financing because it can allow the lessee (the person who leases a vehicle) to drive a more expensive car on a lower monthly payment during its most trouble-free years. At the end of the lease term, the vehicle can then be returned for a new model.
A lessee, however, does not own their vehicle. They drive it under a car lease agreement that is a binding contract. The contractual obligations of a lease can affect an estate plan, so lessees should understand what is in the fine print of their lease contract and what happens to a lease after their death.
How a Lease Works
From 2015 to 2019, there were approximately 17 million vehicle leases per year, representing nearly one-third of all car sales.[1] This was the highest percentage of leasing in history, but leases plunged with the pandemic and now account for around 17 percent of all new models delivered to customers.[2]
With a lease, the buyer and dealer agree to a set term and monthly payment that is based on how much the vehicle is expected to depreciate over the contractual period. Instead of paying an interest rate on a loan, the lessee pays the money factor (the money the lessor used to buy the car).
Leases have mileage caps of 10,000–15,000 miles per year, above which penalties are assessed. They also typically require a down payment, an acquisition fee, and a disposition fee to return the leased vehicle. Any damage determined to be beyond normal wear and tear could result in an additional charge.
Most dealers offer leases from 24 to 60 months. At the end of the lease term, the vehicle is turned in to the dealer. Although lessees do not build equity in a vehicle the same way that buyers can, if the car is worth more than the predetermined residual value in the lease, they may end up with a positive trade-in value.[3]
Ending a lease early can result in early termination fees and penalties. According to Consumer Reports, these charges can amount to thousands of dollars and could equal the amount of the entire lease term.[4] But during periods when the used car supply is tight or a particular model is in high demand, dealers may be willing to make a deal that lets the lessee out of their contract early, says Kelley Blue Book.[5] It might also be possible to transfer the lease to someone else.
Lease Options When the Lessee Passes Away
So how does this effect an estate plan? Well, what happens to a vehicle lease when the lessee dies depends on the lease terms, as outlined in the contract. Below are a few of the standard clauses your vehicle lease might include:
Early Termination Death Clause
The lessee’s death does not alter the lease terms or cause the lease to automatically terminate, unless it contains a provision that allows for early termination due to death. Even if the lease permits early termination in the event of the lessee’s death, it may require a dealer fee along with the return of the vehicle. To prove the lessee has passed away, the estate may have to provide a death certificate.
If the lessee had fallen behind on their payments, the dealer might disallow early termination, repossess the vehicle, and require the estate to pay the lease balance. For a solvent lease, the dealer could permit an estate representative to transfer the lease to another party, including a person in the family willing to assume the lease. Again, it comes down to the contract terms.
Standard Early Termination
Ending a lease early—whether because of death or some other circumstance—could trigger early termination provisions in the contract. This could result in all remaining payments on the lease becoming due, paying early termination fees, returning the vehicle, and paying the disposition fee. These costs can typically be paid from the estate.
Options with a Co-lessee
Lessees do not own their vehicle and cannot leave it to a beneficiary in their estate plan. But they may have a co-borrower or co-lessee on the contract. When there is a co-signer on the lease, that individual typically assumes financial responsibility for any remaining payments after the lessee dies. At that point, the co-lessee could choose to keep the vehicle or look for a lease swap partner. However, some contracts prohibit lease swaps, limit them to a partial transfer, or have prerequisites, such as only allowing swaps on a four-year lease at the two-year mark.
Certain brands and dealers might have a contingency for co-lessees and the death of one borrower. For example, Ford has what it calls a Peace of Mind Program that applies to select leases. If one lessee passes away, the program allows a co-lessee to continue the lease under the existing terms, pay off the outstanding balance, or return it to a dealership within 60 days of the customer’s death without any remaining contractual obligations.[6]
A co-lessee usually cannot be added once the lease is signed. But while the lessee is alive, they can take steps to make estate administration as smooth as possible. Someone with a terminal illness might, for instance, terminate or transfer their lease early to avoid any complications in the estate administration process.
A Car Lease Could Be Overlooked in an Estate Plan
The fact that a lessee does not own their vehicle will likely cause it to be given little attention in an estate plan. One way or another, unless there is a co-signer, the estate will be left to deal with an outstanding car lease. The options for resolving the lease agreement will ultimately come down to the contractual language and, to a lesser extent, the willingness of the dealership to negotiate with the estate.
Following the death of a loved one and before contacting the dealer, an estate representative may want to contact an attorney to review the lease’s fine print. An attorney can help explain how to legally terminate or transfer a lease per the terms provided.
Final Thoughts
So whether you have a lease that’s nearly ready for a trade-in, or you are a co-signer on your loved ones’ lease, Nielsen Law can help provide assistance with ensuring all your assets are accounted for in your estate plan. Nielsen Law PLLC provides family-focused estate and business planning to individuals and families in Austin, Round Rock, Cedar Park, and the Central Texas area. For more information, and to learn about our firm, please contact us. We look forward to working with you.
[1] Short-Term Car Lease: What You Need to Know, Finn (May 17, 2023), https://www.finn.com/en-US/blog/leasing/short-term-car-lease.
[2] Jim Gorzelany, Here’s Why Fewer Consumers Are Leasing Cars These Days, Forbes (Feb. 17, 2023), https://www.forbes.com/sites/jimgorzelany/2023/02/17/heres-why-fewer-consumers-are-leasing-cars-these-days/?sh=1b525f5e4af1.
[3] Sarah O’Brien, Cars Leased in 2020 Are Worth an Average $4,000 More Than Expected. These Models Have Fared the Best, CNBC (Feb. 24, 2023), https://www.cnbc.com/2023/02/24/cars-leased-in-2020-are-worth-an-average-4000-more-than-expected.html.
[4] Jon Linkov, Leasing v. Buying a New Car, Consumer Reps. (Sept. 1, 2023), https://www.consumerreports.org/cars/buying-a-car/leasing-vs-buying-a-new-car-a9135602164/.
[5] Chris Hardesty, Car Leasing Guide: How to Lease a Vehicle, Kelley Blue Book (Feb. 9, 2023), https://www.kbb.com/car-advice/car-leasing-guide/.
[6] FAQ: Special Situations: I am on a contract as a co-borrower/co-lessee, and the borrower/lessee recently passed away. What should I do?, Ford, https://www.ford.com/finance/customer-support/special-situations/i-am-on-a-contract-as-a-co-borrowerco-lessee-and-the-borrowerlessee-recently-passed-away-what-should-i-do/ (last visited Oct. 2, 2023).
