The rules about 529's are counter intuitive--in a tax sense you do NOT own the assets within a 529, they are the named beneficary's. You have for transfer purposes parted with dominion and control over these funds, its a completed transfer PLUS if one contributes to ones self its a nontax transfer/nongift. So a transfer from a UTMA for party X to a 529 for a beneficiary the same X is not a change in the deemed holder of the asset. To own a 529 is to own some generally nontaxable control rights. Ergo, even though the transfer may smell it doesn't appear to violate federal tax rules or DOE reporting rules for FAFSA.
So if a custodian makes a mistake or intentionally violates the scope of custody, and repositions an account inside a 529 w/o a UTMA designation, on paper, we have an empty UTMA and a full 529 with exactly the same $ as before. (less any taxes due to liquidation costs.)
So long as the 529 "owner" makes no personal use of the funds he has not stepped over any lines about converting the sum to personal use etc.
In my example its easier to assume the funds went directly from the UTMA to the 529 and not for one second passed back to the parent to avoid that momentary type arguement about conversion and a new gift. Many custodians use their reqular accounts for clearing purposes and technically do not keep funds segregrated--but lets assume they do.
Obviously if he fails to either use the funds upon the child or turn them over to the child upon the original intended age the child may have a clear recovery course of action--but that's a future speculative event. The voilation is contingent upon future behavior.
I have no doubt that the parent is in technical violation of some UTMA requirement--but certainly not the ones about prudent man type investments. So if a UTMA is taxable and the custodian shifts it to a 529 which is nontaxable isn't the kid ahead of the curve. The sole problem seems to be "owner" of a 529 which is NOT an owner in the conventional use of the word.
The asset is the same place it always was--in an account earmarked for the childs benefit and use. No change there.
The problem lies with the screwy nature of the FAFSA rules which provide for multiple treatments of the same $ amounts for the same person --a 529 owned by an outsider, a 529 or a counted asset owned by the individual, or a 529 or asset owned by the individual's custodial parent, or the noncustodial parent, or even a sibling, or the same sum in a prepaid 529 etc.
If the label on the funds is moved to a more favorable bucket and the bucket is properly reported ----
I merely suggest there are more ways to look at the issues.
Obviously if there are funds still inside the UTMA I would think that one needs to answer that question correctly.
I do not think that for a person to make a contribution into a 529 for ones own benefit is a clear parting of ones ownership of said funds. Its not at all clear--its perfectly muddy! What one has done is to give up some degree of control over these funds to the nominal owner and if the nominal owner is the prior custodian it gets even muddier--and in a sense the 529 owner has even fewer ways to spend the kids money on noneducation w/o some real economic penalities than does a mere "custodian: who I suspect most will agree can spend it on just about anything for the kid that is not otherwise a legal duty of the parent to provide--a BMW, a sweet 16 bash, you name it. So I'm not going to say that the conversion is on its face unethical.
For large sums in similar but not idential situation where the child was the named owner of a custodial account it has been reported on other boards that parents or guardians have gotten friendly courts to agree to reword for ownership issues. For example the child gets an injury damage award to be paid out sometime later upon adulthood or used for his education--words which are fatal to FA--so compasionate courts have allowed word changes so as to permit the child to qualify for FA w/o said sums being counted against them. I am not sure said courts would put their ethics in the same boat with Enron's.