I am buying myself this book for Christmas: Children of the Self-Absorbed: A Grown-Up's Guide to Getting over Narcissistic Parents by Nina W. Brown (See reviews on Amazon)
Your MIL is horribly narcissistic! In a round-about way she sounds like my own mother, who gave me tons of gifts, yet would allow my step-relatives to ignore me even when it involved annual Christmas parties where I'd have to watch my step-cousins opening gifts from my mother and her (now ex) husband, while I received none from the parents/families of most of them. It never mattered how much money my mother spent on gifts for me, which were always just expensive things she liked and not the one or two simple things I'd requested. The real gift would have been standing up for me as a person who mattered. She never did, and on Christmas Day 2001 (I was 35) I finally realized that she would never change, I walked out and have never spoken to her again. I could go on with this, but just don't want to right now...
I think it's great that your DH stands up for you. And, I agree with the other poster who said he should be the one to handle this problem as it could make you look like the one preventing her biological grand-children from getting her gifts. People like that have an amazing way of turning you into the bad guy. And, what you've said about her other behavior (i.e. the cake) is just cruel. And, it's all so disrespectful of all of you, not just the children.
Now, here's a question... DH has two nephews from one brother. They live in Arizona. While he got to know his nephews while living in that area, he now lives all the way across the country. I think he had met his new step-niece and step-nephew once, if that, before this summer when we visited and I met them for the first time. We kind of hardly exist for them, I think. They are all teenagers.
DH has always sent his nephews about $20 each in a card for both their birthdays and Christmas, and continued after our marriage. He sent these to their home with their mother, not the home where the step-niece and step-nephew live. I did say I thought we should sent to the step-children, as well. But, he doesn't want to get anything started. Even though we send Christmas gifts to each family as a whole (i.e. food items) that particular BIL and family do not send anything to us, nor does his ex-wife, nor anything for our birthdays (no cards or phone calls) not even a card for DS's first birthday. (They did send a gift for his birth; although DH's nephews' mother did not, despite the fact that DH has always done for her children.) Should we start something new with everyone by starting to send to the step-niece and step-nephew? By starting something I mean, then it's kind of implied that the BIL and SIL should be sending something to us on birthdays and Christmas, etc. In that regard I'm thinking let's just don't. What do you all think?
Oh, and if we ever did visit at Christmas and celebrate with them we would certainly buy them gifts in the same way we would buy a gift for someone who invited us to their birthday party when otherwise we would not have done so. They are very nice kids. We just have so many family problems already I just kind of agree about not getting involved with any more family members to any extent more than we must. Does that make sense?