I'm not comfortable with this for a few reasons:
I want to be in control of my families' finances.
I don't want even think about needing financial aid as an option.
I don't know if this is weird, but it just feels shady to me.
Speaking as a guy who had zero money for college, put yourself in your child's perspective. How would they feel when they're 18 years old and the grandparents are helping them pay for college? How would they feel when they see other classmates taking out student loans (and jobs) while they're getting a leg up from the family education fund?
I think they'd feel pretty grateful.
Speaking as a prospective father in law (ideally not for another decade or two), this 529 account could be set up for your kid or for anyone else. It's an indication that your PILs have more assets than they think they need, and it's important to them to help out another generation with an educational subsidy. But there's no guarantee that today's generosity will actually go to your kid, especially if some other relative seems to be on a more rocky financial footing. In other words, if you seem to be in control of your family's finances then they may decide that you guys don't need any help after all.
So here's what I recommend you do:
1. Say "Thank you very much, we appreciate it!"
2. Continue to make your own financial plans (including your own 529) as if the PILs were doing nothing (because your kid is still a few years away from college, right?).
3. Let your kid make up their own mind whether to accept the grandparents' financial support.
None of this is about you, nobody's trying to take away any control from you, so I'd recommend that you try not to take it personally.