kudos to your daughter for squashing your SIL's joy at giving her such a ridiculous gift.

I'd suggest cooling off before you talk to her about her attitude. And the sad thing is you'll probably not accomplish anything. I'd just keep my distance and make sure the kids have as little contact as possible. And maybe talk to your MIL about the way she lets those bratty kids treat her. She's not doing them any favors by letting them get away with being cruel. They need to learn NOW the consequences of being mean to people.

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