I don’t quite understand your post about the wife’s first family. But you say it’s the wife’s oldest daughter, so it sounds like the widower is not her father?
In which case, I wouldn’t put much store by the widower saying don’t give it back - sounds like he is not her father, and has no relationship with her. That doesn’t really put him in a position to judge fairly, I think. (for all we know, he could be an arse instrumental in the estrangement!)
I’m also confused how an estranged daughter is aware of a soft toy that is quite new, given by a mother she was estranged from.
So - I feel like a big chunk of the story is missing, plus the age of the daughter is important. Estranged suggests adult age?
TBH, this girl has just lost him mum with obviously a lack of resolution. Possibly with guilt and regret. That sounds very very tough.
Presumably your child is aware of the death. I would get a new toy, and explain to your child that old you is going to be a special comfort to the daughter of the deceased. And that old toy wants new toy to take over being your child’s friend. Keep both toys at bedtime for a few nights, trial a night without old toy - and then give it up.
Even if the daughter is a drama queen... I’m still sympathetic to a teen/young woman (?) who has just lost her mother so young, and following a bad relationship.