Planning for Your Vehicle: Is It Part of Your Estate?
Have you considered what will happen to your vehicle when you pass away? In 2019, it is projected that there will be 281.3 million registered vehicles in the United States. Your vehicle is a valuable asset—as well as a potential source of liability—that you should consider in your estate plan. Vehicles can be owned or leased. The way they are handled after you die depends on these and other circumstances. There are some steps you can take in your estate planning to make sure the transfer occurs smoothly.
Leasing a Vehicle
If you are leasing your vehicle, it is not actually part of your estate because you do not own it. A lease is a contractual relationship, so what happens if you pass away will depend upon the terms of the lease. Do not assume that your family can just return the vehicle to the leasing company with no further obligations or simply continue to drive the vehicle. The terms of vehicle leases vary, so it is important to review the contract carefully.
Leases are often for a certain duration and sometimes specify that they are binding on heirs, successors, and assigns. Also, under the provisions of some leases, if the person who leases a vehicle dies, then an “early termination” of the lease is triggered, but often, there is still a financial obligation to make some or all of the remaining payments. When the lease contains these types of terms, even after your family returns the vehicle to the leasing company, your estate may still have to satisfy the amount of the remaining payments on the lease or pay an early termination fee.
There may also be fees, for example, for processing paperwork or excessive wear and tear. Under these circumstances, we can help your family determine if your estate is responsible for the remaining payments under the lease, and if so, try to reach an agreement with the leasing company to satisfy the lease obligations for a reduced amount.
It is possible that the leasing company or the terms of the lease may permit the transfer of the lease to another person in your family. This arrangement may involve transfer fees, but at least your family may have the opportunity to continue using the vehicle for the remaining period of the lease.
Owning a Vehicle
If you do own your vehicle, it may be part of your estate and subject to probate. However, there are some ways you may be able to avoid probate and the costs and delays associated with it.
(1) In many states, if an automobile is titled only your name, it can be transferred to your beneficiary without having to go through the probate process, which can be lengthy and expensive. The appropriate person, usually a surviving spouse or a child, typically must sign an affidavit before a notary, provide your death certificate, and show identification to the department of motor vehicles, secretary of state, or other government entity. There may be some limitations: Many states allow this simplified procedure only if probate is not necessary for any other assets. In addition, although some states allow it regardless of the number or value of your vehicles, others allow it only if the total value of the vehicles is under a certain dollar amount.
(2) In some states, if you own a vehicle jointly with another person, then the surviving owner automatically becomes the sole owner if you die, even without any specific language included on the vehicle title. In other states, this is the case only if the joint owners are spouses. In most states, you must specify on your title that you and someone else, often your spouse, own the vehicle as joint tenants with right of survivorship. This means that upon your death, ownership vests automatically 100% in your surviving spouse, with no need to probate. Typically, all that your spouse will need to do is go to the department of motor vehicles with the title and the death certificate to obtain a new title in his or her name alone.
Warning: If you are considering making someone else a joint owner of your vehicle just to avoid probate, keep in mind that you will be making a permanent gift to that person which could be seized by his or her creditors. Also, if the co-owner’s interest is worth more than the annual gift tax exclusion (currently, $15,000), you will have to file a federal gift tax return—though no gift tax will be due unless you exceed the federal gift and estate tax exemption, which for 2019, is $11.4 million for an individual.
(3) Several states also offer vehicle owners the opportunity to name a transfer-on-death beneficiary on their registration form that allows the vehicle to be quickly and easily transferred to that person without probate when you pass away. Some states allow this only for vehicles with one owner, but others allow it for vehicles with joint owners, in which case, the beneficiary will own the vehicle only after both joint owners have died. The beneficiary does not have any rights while you are still alive, so you can still decide to sell or donate the vehicle prior to your death.
(4) If you have a small estate, you may be able to transfer your vehicle (and any other assets) without a lengthy probate procedure. Most states have probate shortcuts or allow you to avoid probate completely by allowing those who will inherit your property to claim it by filing an affidavit or by using simplified court procedures. The availability of this option and the amount considered a small estate varies depending upon state law.
(5) Another option to avoid probate is to title the vehicle in the name of your Revocable Living Trust (RLT) when you purchase it, or if you already own an automobile, obtain a new title in the name of the RLT. This will enable the vehicle to be transferred pursuant to the terms of the trust rather than going through the probate process. If you have a vehicle loan, it may need to be paid off before the transfer, as your lender may not agree to a transfer of title to the RLT. In addition, changing the title might involve paying a sales or transfer tax or fee. Also, keep in mind that if you are involved in an accident, the fact that you are driving a vehicle titled in the name of a trust may give the other driver (and his or her attorney) the impression that you have deep pockets, which may make them more inclined to sue you!
Some people worry that transferring your vehicle into an RLT will expose the rest of the assets to liability resulting from a vehicle accident. However, generally, RLTs do not provide asset protection, so there is usually no increased creditor risk associated with including a vehicle as part of the trust’s assets.
However, in some states, there may be increased vulnerability for married couples who have transferred their assets into a joint RLT. A judgment against one spouse following an automobile accident could put all the assets in the joint trust at risk. This really depends on state law. In states in which married couples can own property as tenants by the entirety, a creditor with a judgment against only one of them cannot seize property owned by both of them as tenants by the entirety. Some states have extended this protection to the property even after it is transferred to a joint trust. In states that have not, separate trusts for spouses may provide better protection if one of them is sued for damages after being involved in an automobile accident.
What Happens If There Is a Vehicle Loan?
If your vehicle is financed by an automobile loan, it is important to let your family members and estate planning attorney know. Whether ownership of your vehicle is transferred with or without probate, it is important to make arrangements to avoid a default if there is a vehicle loan. Otherwise, the lender could repossess the vehicle. The new owner, executor of your estate, or court-appointed administrator will need to quickly contact the loan company after your death to take the necessary steps to continue making the vehicle payments or pay off the remaining debt.
Give Wilson Miller a Call
Help lessen the stress on your loved ones by making plans in advance for a smooth transfer of all of your assets, including your automobile. We can help you think through who you would like to receive your vehicle after you pass away and the best way to accomplish the transfer of ownership, as well as draft any documents needed to carry out your wishes. Please contact us to set up a meeting to discuss your options, 501.221.7776.