A living trust is a contract that you create by preparing and executing trust documents, declaring that you are holding assets "in trust". You retain the right to "revoke" the trust at any time, or to take the property back out of the trust.

Because the trust is revocable (changeable), it is treated as a fictional entity during your lifetime. You pay taxes on any trust income during your lifetime, and your creditors could seize trust assets to pay your debts.

However, at your death, the trust becomes irrevocable (since you are no longer around to revoke it), and takes on new life as a truly separate legal entity. Any property owned by the trust is not subject to probate because it is not owned by you or your estate at all. However, the probate court has the authority to resolve disputes about the trust, and the trust usually remains liable for your debts (including any estate taxes).

If a husband and wife jointly create a revocable trust, then when one spouse dies, the trust is usually split into two parts: one contains the surviving spouse's property, and remains revocable, while the other part is irrevocable and is usually earmarked for the use of the surviving spouse, with any balance remaining at the surviving spouse's death passing to the couple's children. However, many different trust arrangements are possible, each with differing legal and tax consequences.

If you properly transfer your property into a revocable trust, then your estate will not need to pass through probate at your death. A carefully drafted living trust can also serve to reduce or eliminate federal estate taxes.

Some property shouldn't be put in a living trust. For example, your tax-deferred retirement plan or IRA is already held in trust, and you cannot transfer these funds into a living trust without first removing them from the existing plan (and paying income tax).