Hey Mama - I'm so sorry you are having to deal with all of this. People do and say horrible things when faced with death and your former in-laws are certainly doing that.
Just some random ideas here:
I know it sucks, but I would clear out everything of your late husband's that you know you won't want to save for your kids. I would then take it to a storage unit and pack it in there. Have someone give the key to your in-laws. If they don't pick it up it will be sold at auction. Most of those places have the first month free. I would then rent a second unit (probably at a different location so you don't have to see the in-laws) and move the stuff you want to save in there.
When you say you can't live there, do you mean mentally? Because if you think it has a bad energy, then try clearing it, or move out. Spruce up the place a bit, and list it on the market as a fixer upper, which gets people excited that they think they'll get sweat equity, and move on. Why hasn't the other house sold?
As far as the 401K, don't tie that money up in stuff for your girls education right away. While that sounds great, you will need money to live on or that will come in handy. Social security for your kids only goes so far. I would also check into WIC right away. When they are older if they need they can get grants or loans for schools at low interest rates - why completely scrimp now to save 4% later?
As far as the in-laws go, maybe just let them know you will occasionally send pictures of the grandkids but for right now you'd prefer to not be contacted. That completely sucks about the shoddy treatment you and they received at the funeral and afterward... but you have to let it go.