Are we doing the right thing?

I just can't get along with my husband's sister. She degrades me and my husband to others and family members. She's been doing it for years and I always let it go, but what happened recently is a little bit too hard to just forget. My dad passed away in May and a few days after we buried him I left my kids at my in-laws who were also babysitting her son. Her son told my kids his mom told him that their mommy is a nasty disgusting woman who comes from a nasty disgusting family. This made my kids cry.

She is a single mom who's main goals in life is to manipulate someone else into watching her son so she can get her drink on and fooling around with any man who will have her. She lies to her parents and portrays herself as being something she is not. She hates me because I know who and what she really is. I know what types of things she has done and currently does. She tells people I am a lazy mother who refuses to get a job and who makes my husband work so much because I have to try to outdo everyone. I am far from demanding. I live in a small 3 bedroom home out in the country away from it all but it is paid for. I have a car that is 5 years old but again it is paid for. I am not stuck on material things. The only thing I can figure out is that she is jealous of me and my husband's relationship because she doesn't have one. She's so miserable with herself that she hates us because we are happy or she hates me because she feels I took away the only man in her life. Her brother. They used to be close as kids but he grew up and is serious about life and she still acts like a carefree teenager. My husband and I sat down after being so hurt and had enough pain this year with everything that has happened that we decided to just wash our hands of her. We are tired of her hurtful ways and in our opinion a family isn't a group of people who constantly hurt each other over and over. His parents blame us and just expect us to keep quiet and go on like nothing ever happens all the time. They place no blame on her actions at all. So we keep our distance from all of them. It's a sad ending but for us it is the only way to keep from being hurt and protecting our kids from having to listen to others degrade and belittle us to them. It's terrible.