I think you may mean she was "beneficiary" (she may have also been successor trustee)?
Whether or not these transfers are proper depends on how the assets were titled. You say GF did not have assets in his trust - but did he have a "pour over will" transferring assets to his trust or the other trust? The pieces have to be reviewed and looked at to determine if things were done correctly. Assuming both grandparents had the intent to fund the initial trust but failed to do so it will be hard to say if that was intentional, accidental, etc. So you need more facts. I would suggest having an experienced probate attorney review things.
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You should consult with a trust attorney. There are a number of different facts as well as relevant documents that should be reviewed and discussed. In general, when spouses create AB Trusts, the surviving spouse's resulting trust (here your grandfather) is typically revocable, meaning your grandfather can make changes to his trust and do with his portion of their assets as he pleases. It also sounds like your grandfather did not "fund" the trust since he did not actually transfer assets into it. It is possible that action was subsequently taken to correct the failure to fund. If that is true, title to the property would be in the name of the trustee as trustee of the trust (e.g. Jane Smith, trustee of X Trust). Again, you should consult with a trust attorney.
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Estate planning for blended families can be tricky. The thought that the survivor would favor his or her own is often overlooked. Whether what happened is proper or not depends upon the documents. Step one is to take the documents to a qualified estate planning attorney to review. Nothing can be known with certainty until the original and the second round paperwork is reviewed.
Many Husband and Wife Estate plans done during the past 15yrs without considering blended family issues were done so that on the first death one half the property went into a trust for the benefit of the survivor and if anything was left after their passing that half would be divided between both husband and wife's kids. The surviving spouse's half would during their lifetime be under their sole control and be redirectable to go to to just the survivor's kids. In an article I recently wrote I referred to this as a three quarter's plan in that the survivor's kids end up with three quarters of the estate.
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