Yes, it’s now your father’s money and he can do with it, as he pleases, including taking it all out for himself and spending it on non educational expenses. This is always the danger of having other people hold your money or money designated for your purposes. Not that you had any choice , most likely, in this scenario.
I’ve seen this happen a number of times where folks put away money into a 529–(sometimes that 529 has contributions from many other people as well ) and then decide later , sometimes much later, that they need that money.
The federal tax liability is not likely to be a big deal. Your father will get a 1099Q from the 529 when he cashed it out. It will indicate what part of the distribution is earnings. That is reported on the 1040 when he files his federal tax returns, as additional income along with a 10% penalty on the amount.
Where it can become very Complicated is if the 529 has contributions that got a state deduction or credit. In our case, both of our 529s gave us state tax breaks when we contributed ( one still doesn’t as it allows carry forwards of amounts!). In that situation, those amounts have to be recaptured on the state returns. It’s also an issue if people other than your parents contributed and deducted those contributions from their state taxes. How any give state tracks its 529s , I do not know. But, bottom line, I’d your father was getting tax breaks when your mother was funding that 529c the state is going to want those breaks recaptured. That can be a complicated tax mess.
I would walk away from the mess. Do let your father know that if he cares to use any of that money towards his grandson’s education , he may get a tax break in amounts so expended. Then leave the rest up to him. You might also want to apprise him that there are state recapture rules if that is the case for his 529.
I know it’s disappointing but this happens often in less directed ways. I know many many families where grandpa or Aunt Jane or big brother promises to help out with college, reiterating the promise regularly, right up to the point when payment is needed and then regretfully reneging. One of my son’s very close friends committed to a very expensive school because his grandfather insisted he do so, and promised to pay the tuition. After the first year hit, he said he could not afford to do so any more.