Many of the posters have previously said on other threads, that if a relative was to give or propose to give money for another's education, That money this would show up on FAFSA and be detrimental to possible financial aid. This is correct.
Your basic question, IMHO, is that the Aunt probably has done the conservative course and kept the ownership in her name.
1. FAFSA does not see this asset.
2. The probability that both of your children would not go to higher education is slim. Possibly one child may not but not both. Since a 529 is transferrable between children then one or both will stand to benefit.
3. State that the Aunt lives in gives a tax benefit (deduction or credit) she will get a one time benefit if she makes a one time deposit. For Oregon the limit is a deduction of $2000 (single filing) which translate to $180. So even if she deposits $40,000, she would only get a $180 benefit. Don't sweat the immediate tax benefit.
4. Assuming the Aunt has pledged the money to your children, she has the unwelcomed responsibility to see that it is safe and properly invested. Investing is not a fun thing to do in a declining market and thankless in a rising market.
5. If your children are in their early years, consideration should be given to Coverdells and UGMA'S because of their flexibility.
6. If today, your child is to attend a public college, $20,000 in a 529 either in your ownership or child's custodial ownership, Financial aid in terms of types of loans or possible competitive scholarships could be impacted. If the child was to private school, $20,000 in a 529 or other accounts would probably not make much difference.
7. Since there is a generation skipping, Grandmother to grandchild (grandaunt to grandchild) a possible tax maybe imposed on the beneficiary.
8. Money between relatives, even between parent and child, is very funny, sometimes it is best not to have any money. Your goal is to do the best you can do, regardless of what relatives do. The goal of your children is to do the best they can do, regardless of what the parents do.