The living trust is an important estate planning tool that helps a person's loved ones avoid probate. It legally transfers ownership of the person's assets, which are managed by a trustee named by the creator. After the creator -- or trustor -- dies, the trustee distributes the assets according to the rules established by the trust.
Reading the Trust
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 that the beneficiary's asset can be distributed in accordance with the trustor's wishes.
The Contingency Beneficiary
Many living trusts establish a contingent beneficiary in the event that one or more beneficiaries die. The contingent beneficiary inherits the asset if the original beneficiary dies. When this occurs, the trustee transfers the ownership of the asset to the contingent beneficiary. If the trust does not name a contingent beneficiary, then it may provide instructions for passing the beneficiary's inherited assets to the beneficiary's heirs; alternatively, it may divide the inheritance between the other beneficiaries.
Read More: Rights of Primary Beneficiary vs. Contingent Beneficiary
Sharing The Assets
Sometimes, the trust 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, her assets would then be divided among the children. Usually, this division occurs in equal parts, although it doesn't have to; it depends upon the terms of the trust. If the trust doesn't name the other beneficiaries, then the trustee may let the asset become part of the deceased beneficiary's estate.
Passing it Down
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 -- meaning, without a will -- then the state will decide how the asset is distributed. Alternatively, the beneficiary may have already made arrangements. Keep in mind that once a living trusts's assets have been distributed, the trust no longer exists. As a result, consult an estate planning attorney who is familiar with the laws of the state where the trust was created.