What Happens to a Living Trust After the Beneficiary & Owner Dies?

A living trust is an important estate planning tool that helps a person's loved ones avoid probate and having assets distributed through the court system. It legally transfers ownership of their assets, which are managed by a trustee named by the creator. After the death of the creator – also known as the grantor or trustor – the trustee distributes the assets according to the rules established by the trust. This would be the case unless the trust specifies that the assets remain in the trust fund until the beneficiaries reach a specific age or some other event occurs.

The grantor and beneficiaries are different in most cases, such as in a family trust. Things can get complicated if the owner is not the beneficiary and both the owner of the trust and the beneficiary die at the same time. Reviewing what happens to a trust when the beneficiary dies and the owner passes before the trust is changed will help you work with an attorney to settle the situation.

People who take the time and money to set up a trust often provide for this exact set of circumstances. For example, a trust may name a contingent beneficiary. The trust agreement may decide to split the beneficiary's share between the remaining beneficiaries, or it may pass the beneficiary's share along to the beneficiary's descendants. It's up to the trustee to understand the terms of the trust so the beneficiary's assets can be distributed in accordance with the grantor's wishes.

Some trusts are revocable. They can be changed during the term of the trust. Others are irrevocable and can't be modified, explains the American Bar Association. The grantor can act as trustee of their own revocable trust, but must appoint someone else in the case of an irrevocable trust. A revocable trust automatically becomes irrevocable when the grantor dies because that individual is no longer available to make changes to its terms. A grantor who acts as trustee of their revocable trust typically names a successor trustee to take over when they die or if they should become incapacitated and unable to manage the trust any longer themselves.

Many living trusts establish contingent beneficiaries in the event that one or more of its beneficiaries die. The contingent beneficiary inherits the asset if the original beneficiary dies. The trustee transfers ownership of the asset to the contingent beneficiary when this occurs. The trust may provide instructions for passing the beneficiary's inherited assets to the beneficiary's heirs if it doesn't name a contingent beneficiary.

The trust sometimes instructs the trustee to divide the assets of the deceased beneficiary between the remaining beneficiaries. For example, a trust may name the decedent's spouse and children as the primary beneficiaries. When the spouse passes, their assets would then be divided among the children.

This division usually occurs in equal parts, although it doesn't have to. It depends upon the terms of the trust. The trustee may let the asset become part of the deceased beneficiary's estate if the trust doesn't name the other beneficiaries.

When the asset becomes part of the beneficiary's estate, what happens to it is a matter of how the beneficiary's personal affairs were managed. If the beneficiary died intestate – without a will – the state will decide how the asset is distributed. Alternatively, the beneficiary may have already made other arrangements. Consult an estate planning attorney who is familiar with the laws of the state where the trust was created.

In some cases, a person will set up a trust to protect their assets while they're alive so they can live off the interest or earned income from the trust fund. A self-settled asset protection trust is an example of this type of trust, It's an irrevocable trust, according to Promise Law.com. Both the owner and beneficiary die in this case when the owner dies. Their will or the trust documents should spell out what happens to the trust in this case. The state court system will decide what happens to the person who died intestate if neither addresses the situation.