I'd first question why you're SELLING your old phone to your grandparents...haven't they done enough for you?
1) It depends if they're current AT&T customers. May call AT&T just to verify. You should still be eligable to upgrade if the plan is still active (?) Again, I'd call AT&T. (I wouldn't say that you don't have the phone anymore)
1. Yes, the same way that you activated it the first time.
2. Yes. If this is a problem in your mind, don't have them activate the phone until your 3G one is activated.