1) Yes if you start the game you both can create a character.
2) For local multiplayer you don't need xbox gold membership it's just splitscreen multiplayer.
3) Yes you can, but you have to start the game and he has to join in your game then.
4) If the other player leaves the game his character will be added to your party so you can control it.
Hope I'm correct in all these things but that's how I understood it.