New SIM card for iPhone when transferring to another person?

So my Grandfather is an early adopter of all things Apple - and decided he doesn't want the iPhone he bought and set up six months ago. He gave it me and now I intend to transfer my old number over to his phone with a new ATT account and cancel my Verizon account (and toss my horrible Palm700).
ATT told me I have to go to the store and buy a new SIM card since his number is tied to the old card and that a hard reset doesn't clear it. Any truth to this?

You will need to get a new SIM from ATT. Sometimes ATT will charge for the SIM and other times, they give them to people for free.

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