There are two reasons that I can think of for why you might want to convert UTMA accounts to a custodial 529:
-More favorable consideration if applying for need-based financial aid. In this case, the conversion just needs to be done sometime before filling out FAFSA and Profile, where assets are reported as of the day of form completion/submission.
-To take advantage of the tax-free earnings that 529 accounts provide, when distributions are used for qualified education expenses. The decision on when to do the conversion in this case depends on a number of factors, including the type of investments, age of the student, and time frame for using money. For instance, it probably wouldn't make any sense to convert, get only a few months of tax-free growth, and then take a distribution from the 529.
Keep in mind that you will have to liquidate the current UTMA account(s) in order to convert the funds to a custodial 529 account. What kind of capital gains implications will there be? Paying a big capital gains tax (with a wholesale liquidation) to avoid paying tax on what might be minimal future earnings probably doesn't make much sense. Yes, if you keep the funds in a straight UTMA to use for college expenses you might incur capital gains tax when you liquidate to pay those expenses, but you can lessen the pain by liquidating in smaller chunks as necessary.
Money in a grandparent-owned 529 is not reported as either a student or parent asset on financial aid forms, but any money distributed from the 529 for the benefit of the student must be reported as student income in the year of distribution. FAFSA treats any student-owned or parent-owned 529 account as a parent asset. Profile schools treat all parent-owned 529 accounts as a parent asset, and some will also treat student-owned 529 accounts as a parent asset (like FAFSA) instead of a student asset. Generally, financial aid formulas give the harshest treatment to student income and assets, then parent income, and then parent assets.
What this all means is that money from a grandparent owned 529 account, when distributed and counted as student income, will have a much bigger impact on a need-based financial aid award than will that same money sitting in a parent-owned 529 account. However -- because of the new prior-prior year FAFSA and Profile reporting requirements, it's possible for grandparents to begin giving a student money as early as spring of the student's sophomore year, without that gift ever needing to be reported on a FAFSA or Profile form, assuming that the student graduates in the normal four years. So if the student can afford to wait for money from the grandparents until the student's sophomore spring semester, that money will have no financial aid consequences (again, assuming a four year college career).