Where Catholicism lost influence and property during the reformation, what did Luther think should be done with the acquired assets?

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Considering the intensity of the reformation one might possibly imagine some extreme idea like burning down the monasteries and tossing out the monks as heretics, or even burning them, but such is the opposite of what Luther was about at the personal level. Although Luther has said some of the most harsh language ever recorded against Catholic doctrine, Luther had a very kind attitude towards Catholics themselves, in terms of their welfare. As a matter of history, Luther in fact directly sought to ensure their protection and economic welfare.

With regard to rural monasteries, Luther did no suggest they be burned down, but instead to treat kindly those in error through Christian love, even to support them financially for the rest of their lives:

Since no one is to be coerced into faith and the gospel, those who because of their age, their bellies, or their consciences elect to remain in the monastery should not be ejected or harshly dealt with, but should be supported for the rest of their days just as before. For the gospel teaches us to do good even to the unworthy, just as the heavenly Father sends rain and sunshine upon the good and the evil alike [Matt. 5:45]. We must remember, too, that these persons have drifted into this estate as a result of the blindness and error which prevailed generally, and have never learned a trade by which they could support themselves. (Luther's Works 45.171)

For those monasteries in the cities Luther thought they could be converted to Christian schools. I presume he meant any monks or nuns who wanted to stay would be relocated to rural locations.

Luther had the same loving approach with respect to bishoprics, foundations, and chapters which have under their control lands, cities, and other possessions, etc. His aim was to build a community chest for the poor, 'for all who were needy among the Christians.'

Where the remaining family which originally endowed the properties to the church were now suffering poverty Luther thought it should be divided between the poor and the original family:

If the heirs of the founder are impoverished and in want, however, it is fair and in harmony with Christian love that the foundation revert to them, at least a large portion of it, or the whole amount if their need be great enough to warrant it. It certainly was not the intention of their fathers—and should not have been—to take the bread out of the mouths of their children and heirs and bestow it elsewhere. And even if that was their intention, it is false and un-Christian, for fathers are in duty bound to provide for their own children first of all; that is the highest service they can render to God with their temporal goods. But if the heirs are not poor and in need of it, they should not take back their father’s bequest, but let it go into the common chest. (Luther's Works 45.173)

So we see that though Luther strongly condemned the beliefs of Catholics during the reformation his personal attitude to their persons (not their doctrine) was like a caring father desiring to take care of all involved. This bit of history is somewhat of a surprising liberal and generous position, easily overlooked by the doctrinal passions and battle of the reformation.

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