I had started typing out a big response, but realized that we already had an article that describes your situation: http://www.savingforcollege.com/articles/the-magic-of-beneficiary-changes-on-a-529-account
If you still have questions, come on back; happy to answer.
VP, Research & Development
This information does not constitute tax advice and is provided for informational purposes only. Please consult your tax advisor, financial advisor, local taxing authority, and/or plan provider or sponsor for more information.