When you say "we tried" does that mean you did it, or something prevented you from doing it?
I don't believe taking funds out of the UTMA on behalf of the minor to gift to the grandparents is living up to your fiduciary responsibility as custodian of the UTMA. What is the benefit to the minor in gifting money to the grandparents?
You see this thread and another of parents who did not live up to their fiduciary responsibility as a custodian of the UTMA and their kids are coming back later and suing them? This is a perfect example of why. Let's forget what the ultimate goal of taking the money out is - what if the grandparents didn't cooperate and put the funds back into the 529? Additionally, there are set procedures for rolling UTMA funds into a 529 - that encompass additional restrictions on that 529 money. You've ignored those rules to get restricted money out of the UTMA and into an unrestricted 529. What you are doing goes against IRS/UTMA/529 rules because the money is now in the 529 (not a UTMA/529), and totally under the custodian's control. There is nothing which guarantees the money to the beneficiary any longer - the account owner could take the money out and do what he likes at any time for any reason. The owner could change the beneficiary. You have changed irrevocable trust funds into a 529. You literally gave the grandparents money from the child's trust and they can now do whatever they like with it.
If you didn't succeed in doing this, don't think about it any longer - it's a bad idea. If you've already done it, if I were you, I would replace the money in the trust which you "gave" to the grandparents.
[This message has been edited by rsinj (edited October 15, 2004).]