What is a living trust?

A trust is an arrangement under which one person, called a trustee, holds legal title to property for another person, called a beneficiary. You can be the trustee of your own living trust, keeping full control over all property held in trust.

Why should I make a living trust?

The big advantage to making a living trust is that property left through the trust doesn't have to go through through probate court. In a nutshell, probate is the court-supervised process of paying your debts and distributing your property to the people who inherit it.

The average probate drags on for months before the inheritors get anything. And by that time, there's less for them to get: In many cases, about 5% of the property has been eaten up by lawyer and court fees.

Still, not everyone has to worry about probate, and some people don't need a living trust at all.

How does a living trust avoid probate?

Property you transfer into a living trust before your death doesn't go through probate. The successor trustee -- the person you appoint to handle the trust after your death -- simply transfers ownership to the beneficiaries you named in the trust. In many cases, the whole process takes only a few weeks, and there are no lawyer or court fees to pay. When all of the property has been transferred to the beneficiaries, the living trust ceases to exist.

Is it expensive to create a living trust?

A basic living trust isn't much more complicated than a will, and you probably won't need to hire a lawyer. With a good self-help book or software program, you can create a valid Declaration of Trust (the document that creates a trust) yourself. If you run into questions that a self-help publication doesn't answer, you may need to consult a lawyer, but you probably won't need to turn the whole job over to an expensive expert.

Is it a hassle to hold property in a living trust?

Making a living trust work for you does require some crucial paperwork. For example, if you want to leave your house through the trust, you must sign a new deed, showing that you now own the house as trustee of your living trust. This paperwork can be tedious, but the hassles are fewer these days because living trusts have become so common.

Is a living trust document ever made public, like a will?

No. A will becomes a matter of public record when it is submitted to a probate court, as do all the other documents associated with probate -- inventories of the deceased person's assets and debts, for example. The terms of a living trust, however, need not be made public.

Does a living trust protect property from creditors?

No. A creditor who wins a lawsuit against you can go after the trust property just as if you still owned it in your own name.

Generally, after your death, all property you owned -- including assets held in a living trust -- is subject to your lawful debts. For example, if your house is held in trust and passes to your children at your death, a creditor could demand that they pay the debt, up to the value of the house. Ownership of real estate is always a matter of public record, so creditors can always find out who inherited real estate. It can be more difficult for creditors to know who inherits other property, however (because a trust document, unlike a will, is not a matter of public record), and they may not bother tracking it down.

On the other hand, probate can also offer a kind of protection from creditors. During probate, known creditors must be notified of the death and given a chance to file claims. If they miss the deadline to file, they're out of luck forever.