Many are concerned that probate costs --and lawyers fees -- will eat up their estates. But few understand what probate is, what it isn't, and what it costs. Probate is a legal proceeding in the courts of the state where a person resided at the time of death. These courts process the property of the deceased to make sure debts are paid and beneficiaries receive their appropriate shares. These courts may be called "probate" or "surrogate" or "chancery," depending where you live.

Contrary to popular belief, estate taxes have nothing to do with probate. This means that even if you avoid probate, you will not save estate taxes that may be otherwise due. If you die with an estate having net property value of less than $1,000,000.00 (as of 2002 with values changing every year unless bill passed by congress to solidfy estate tax repeal, check with your advisor on the unified credit) there will be no federal estate taxes. If you have an estate of more than $1,000,000.00 (see above), because unmarried cohabitants can not take advantage of the marital deduction, you federal estate taxes will be assessed at the prevailing rates.

You have probably read that living trusts will keep estate costs down, keep your personal information private from prying eyes, speed up the settlement of your estate, shield your assets from creditors, and allow your beneficiaries to get distributions faster. This may or may not be true. You have also probably read that by using joint ownership for property or bank accounts, you will avoid probate and your estate. This is incorrect.

For example, if you put your partner's name on a $20,000 certificate of deposit and you die, your partner will have ownership of the account and the account will bypass probate; however, the entire $20,000 will be included in your estate -- except to the extent that the surviving partner can prove that he or she contributed to the original fund. And also, when you put a second name on an existing asset, this transfer is a gift and the gift tax laws apply -- another bucket of worms.

Convinced that the living trust (often called "loving trusts") instead of wills and other planning tool is the best way to plan their estates and avoid both probate and lawyer's fees, millions of people have decided to use these documents. Unmarried cohabitants are interested in living trusts for these and other reasons: Because unmarried cohabitants are not automatic "heirs" under state inheritance laws, these couples are looking for ways in which to make sure assets get to intended people as efficiently as possible.

But whether living trusts are better than wills and can do everything enthusiasts say they can depends not only on what you are looking to do, but also where you live. In some instances, living trusts can even defeat your desires.

A living trust is a revocable trust -- meaning that you can change or terminate it at any time while you are competent -- that, properly prepared and implemented, can allow you to carry out your wishes -- in both life and death, leave you in charge of your wealth until you die, and avoid probate. Like any other trust, there are legal requirements for signature, witnesses, and notarization that must be complied with under the law of the state where you live.

As the creator of the trust, you will be called the "grantor" or "settlor." Once established, you will generally transfers all assets to the trust. The transfer of assets into the trust can become somewhat involved when real estate, stocks, IRA's, automobiles, and the like are involved. As you acquire other assets, they too should be transferred into the trust because if assets are not owned by the trust for any reason and the grantor dies, those assets will go through probate -- which is what you were trying to avoid in the first place.

Normally, as the grantor, you will want to name yourself as the "beneficiary" of the trust and to designate who will inherit the assets and under what conditions upon your death -- just like a will. And normally, as grantor, you will want to receive the income from the trust until your death and retain the right to revoke, amend, or change the terms of the trust.

But remember: Laws governing trusts differ from state to state. For example, some states allow the grantor to act as trustee -- that is continue to manage his or her money, put more in or take some out, as he or she sees fit -- while others do not allow the grantor to act as trustee. This means that a third person must be appointed to manage the assets. And this can mean lack of control and unwanted continuing expense.

The expense of probate -- legal and administration fees -- also varies from state to state. For example, probate expenses on a million dollar estate can range from less to $5,000 to more than $25,000 and upwards of $50,000, depending on where you live and the complications that may arise.

So, before you choose to use a revocable living trust, you should make sure you understand the long-term effects and what it will -- and won't -- do for you and your partner. Generally speaking, there are no tax benefits involved if you choose to use a living trust. This means that your estate will include all assets that are transferred into the trust -- even though those assets will not pass through probate.

So check into the law in the state where you live and find answers to the following questions from a competent attorney before you decide what to do.

What are the comparative costs of trust versus probate? In some instances, the cost of the trust could even exceed the cost of probating an estate. For example, find out what happens if the trustee becomes incapacitated and unable to make decisions. Who will become the substituted trustee and at what cost? Will a bond be necessary?

If you continue to acquire assets and do not include them in the trust, what will be the cost of probating only a partial estate? Since you must physically transfer each current and new asset into the trust by deed or bill or sale, there is a cost involved. What is that cost, how will the transfers be accomplished, and how will a transfer into your living trust affect assets titled jointly with your partner? Since your living will allow a substitute trustee to handle your financial affairs if you become incapable of doing so yourself, will you still need a durable power of attorney for financial matters? What if there's an on-going business involved -- how will the business be managed through the living trust and after your death -- and by whom?

What are the delays in probating an estate as opposed to handling an estate governed by a living trust? Generally speaking, the major roadblock to clearing an estate is the time it takes for the Internal Revenue Service to approve the estate tax returns. There is no assurance that an estate governed by a living trust will take any less time to clear than an estate governed by a will because, again, avoiding probate has nothing to do with your taxable estate.

Are distributions to beneficiaries expedited by using a living trust? In most instances, beneficiaries can receive access to distributions whether the estate is governed by a living trust or a will.

Is there any more privacy with a living trust than with a will? Because you will avoid the probate process if you appropriately use a living trust, your living trust has the advantage of keeping your financial matters private. But how many times have you heard about anyone going into the probate court to read an estate file? Sure, we assume it happens, especially with famous people. Find out from your lawyer all of the pro's and con's and then make your decision about the importance of privacy.

What is the deadline for creditors or disappointed heirs to file against an estate as opposed to a living trust? Each state has laws that set time frames in which creditors and those who might want to challenge an estate to make their claims. The time period is generally three to six months. With living trusts, there is no such time limitation. This means that questions could remain open for years, and the longer the issues are not resolved, the more expense is involved.

How will the living trust affect Medicaid Planning? Although more and more Americans are drawn to the living trust -- either through attorneys or what are known as "trust mills," depending on the circumstances, living trusts may interfere with the spenddown features of Medicaid planning. Ask your lawyer how this could affect you.

Although a living trust can be a flexible vehicle with which you can dispose of your estate by mirroring what would have been put in your will, there are potential drawbacks and continuing responsibilities that you must learn about before you act.