When do dead Evil Elders join the villain?
What you are missing is that the rules are slightly different for Competitive and Cooperative play. In a competitive game, the rules allow each player to accuse a single Town Elder of being evil, thereby showing that the Town Elder faked his death, and subsequently joining the Villain. The Evil Elder will add +1 Combat to the Villain, and will add +1 wound to the Villain (if the Villain is about to take its last wound). Preventing an opponent from winning is a good strategy if you want to win. (page 19)


  4. Accusations - One other advantage of investigating the Town Elder’s Secrets ahead of time is that when a player starts a Showdown, each other player may make up 
  to one Accusation of a Town Elder, calling them out as being evil! [...] If the revealed Secrets turns them into an Evil Elder, they immediately join the Villain.
  
  Winning the Game - The first player to fight a Showdown with the Villain, AND defeat it, saves the town of Shadowbrook and wins the game.


In the cooperative game though, dead Town Elders have their secrets revealed immediately. If they were evil, they become Evil Elders and join the Villain. (page 20)


  Town Elder Secrets - [...] When a Town Elder is killed, move the Shadow Track as normal and then reveal all of that Elder’s Secrets. Any Keyword Evil Secrets they have immediately take affect, turning them into an Evil Elder instead.