's a link to some books about siblings (and, really, that's kind of how VeeGee and my brother, Ben, relate to each other).
One thing that's really been neat is that, because my brother is being educated to be a self-advocate, he is very aware that he has Down syndrome, and that he has special needs. Because of his awareness, he's very protective of my daughter as well. Also, they share some interests. He's now "too old" for things like The Wiggles and Barney, though he really really still loves them, so he gets to share those things with her (a way for him to still be connected to some things that he's being otherwise encouraged to "outgrow"). So, whenever one of those traveling shows comes to town, he invites VeeGee to go as his "date." That way he gets to see something he wants to, but he also gets to feel like the big uncle.
Back to the sexuality thing, relative to you MIL: it's often very difficult for parents of kids with special needs to acknowledge these behavioral issues. We spend a lot of time just trying to keep our kids alive, advocate for their education and health needs, educate ourselves, etc. etc. So, when we're home, it can be very easy to turn a blind eye to behaviour that may make others uncomfortable. So, it may not be that she's not willing to take the lead, but, rather, that she just doesn't see it.
In our case, we decided that it was best to not "tattle" on Ben to my parents because that would make it a bigger issue/event than necessary. Making a big deal out of it can backfire on you because, if he's feeling the need for attention in a social situation, he might "misbehave" just to get that rise from you. If you treat it firmly, but quietly, he's less likely to get the additional pleasure from getting to you. Does that make sense? My husband just goes in and makes sure that VeeGee's not in his lap, and him being aware, opening the door if one of them closes it, and checking frequently (they like to go in Ben's tv room and watch videos), seems to make Ben aware that we're watching, and therefore helps him remember not to do the offensive behaviours.
Hope that helps.
I'm very glad that you're becoming interested in teaching your little one about her uncle. Hopefully that will help develop compassion and understanding in her, and, maybe she'll develop a sweet friendship!