OP, I've read this thread with interest. Firstly can I just say that I think your family have been exceptionally kind and generous to help out your FIL in the way they have, and at the very least your DH should be very grateful that they have done so. They have demonstrated what Christmas is really about when you take a big dinner and presents out of it. But 6-7 years of having their Christmas and family get togethers ruined or made uncomfortable is a long time. I also think that you having years and years of your FIL picking on you - well you've shown the same generosity of spirit you've been brought up with. But equally you should not be expected to just be a sponge sucking up non stop abuse.
I think you & DH should be looking at the immediate here and now, Christmas this year, and what you should be doing in the longer term.
In the short term your DH needs to call his father out on the behaviour. He needs to take away your DF position of power - power he's built up by you and your family being too nice and considerate to draw attention to it, and power your DH has given him by not confronting him before.
It should be done from a position of love and concern for him that there is something wrong and he is worried about FIL. There must be something wrong for him to be behaving like this. He should cite examples illustrating how FIL has treated you and individual members of your family badly, and how you and your family have treated him in return - kindness, love and generosity. That way your FIL knows your DH knows exactly what has been going on and he can't fudge it. It should be made clear that as husband and wife you obviously have no secrets from each other. That he does love his DF but what is happening is not only upsetting to you and your family, but is extremely hurtful to DH as he loves you and he loves your family.
It should also be pointed out that:
a) you are his wife and mother of his children and so will always be first priority (as it should be) for your DH - no matter what the outcome. He doesn't want there to be irreparable rifts, he loves his DF - but his wife and children come first
b) you are FIL's daughter in law & mother of his GC - why wouldn't FIL treat you with respect? What is his problem? It is unacceptable.
c) your family who have only treated him with kindness and adopted him into their family should always be treated with respect, and unless he does so he cannot expect to be welcomed as a member of that family. Again what is his problem?
d) Your children are of an age/will soon be of an age, where they will / are noticing what FIL is saying to you, their mother which is a complete no no. They are also noticing how FIL is treating their aunts, uncles, grandmother etc etc and asking questions. These people may not be important to FIL, but they are blood relations to your children and just as important to them as FIL is. So this has to stop. If it doesn't then there will have to be restricted and supervised access.
DH wants everyone to move forward. FIL is his DF - he loves him, he and you are prepared to make a fresh start if DF acknowledges what has been going wrong and agrees to begin again. But that there must be demonstrable proof and change of attitude between now and Christmas.
With regards to Christmas this year, I would take the upper moral ground. I would see your family Christmas Eve and Boxing Day this year and invite FIL to you for Christmas Day (possibly also invite BIL & family). It should be made clear that spending time with him at Christmas this year is going to be dependant on how he behaves in the meantime. DH should make it clear that next Christmas you will at your family's for Christmas Day, and that at the moment because of how he has treated them, he is not invited. DH doesn't know if that can be changed - its up to FIL to make amends. You & DH may be able to help facilitate that, but things can no longer continue as they have been, there must be change.
He needs to be compassionate but firm about boundaries.
If things do not significantly improve then in the longer term, you and your DH should be talking about what the underlying issues are.
If it was me I would be asking these questions anyway:
1) Has he always been this offensive with you?? Even when your MIL was alive?? (it sounds as though it took a while for him to start being obnoxious to your family - seems to be progressive)
2) Why does your BIL not have him? And I don't mean the 'well I work at Christmas' excuse. I mean the real reason. Is he horrible to your BIL and his wife/partner and family? If he is, how long has that been going on?? Has he always been like that or is there a time period when he noticeably started getting really nasty?
3) Is he being horrible to you or your family in front of your children?? - are they witnessing this/at an age where they will be paying attention to what is being said??
4) What is he like with your DH? Does he make those sort of comments about your DH to your DH? - Is your DH so used to all the nasty comments that its become normalised??
5) What was your FIL like with your MIL? Did he treat her similiarly??
6) Does your DH think this is normal behaviour? If this was someone else who wasn't his DF behaving like this, what would he be thinking?
The reason why I ask about this is, if FIL behaviour has become markedly worse over the years, or if its really sparked off after losing your MIL, there may be a medical reason. He might have always been abit obnoxious, but sometimes certain illnesses can enhance different traits.
I'm not medical but I deal with older people alot including those with dementia. I've recently come across someone in their 90s who has just been diagnosed with the Behavioural Variant of Frontotemporal Dementia (FTD) which I haven't seen before. Its not like Alzheimer's with loss of memory. However FTD usually affects much younger people - I don't know your FIL's age. Behaviour can be really obnoxious, difficult, unpleasant and hurtful remarks, impulsive and tactless comments calling people stupid or telling them to be quiet etc etc.This sort of behaviour is really challenging and for family on the receiving end very upsetting.
I would recommend looking Behavioural Variant FTD up to see if they fit your FIL. But briefly symptoms include:
a) Loss of inhibitions, inappropriate, tactless actions or speech towards others
b)Loss of interest in people/things/loss motivation (but not sad)
c) Loss of sympathy/empathy towards others. Reduced humour or laugh at other's misfortunes - appears selfish and unfeeling
d) Repetitive, compulsive or ritualised behaviours inc repeated phrases, gestures, hoarding and obsessions with time keeping
e) crave sweet, fatty foods or carbs. Forget table manners.
f) struggle with planning, organising and making decisions.
g) Day to day memory & functioning will often be completely normal. Lack of insight of what is happening and lack of control over behaviour.
I don't know if any of the above fits with your FIL. Your description where he doesn't do it where your DH can witness makes me think that its possibly not FTD as it appears calculating and manipulative so I would err towards a MH problem, but I'm not medical. But in my line of work, when I come across someone (not necessarily always elderly) exhibiting certain traits and behaviours, I do a mental run through of possibilities of - Altzheimers, Vascular Dementia (brought on by mini strokes), FTD, Stroke, something neurological, Abuse, Depression, Autistic Spectrum or MH problems eg Narcissism, Obsessive Compulsive Disorder etc etc.
You, DH and BIL should be sitting down and really having a good talk about this. If it is something medical, firstly there could be treatment, support or help available, secondly and most importantly - if you know what you are really dealing with you will know what to expect and it helps to see the person's behaviour through the lens of illness rather than just being a horrible person. It might make your DH more willing to tackle your FIL if its an illness.
I can only imagine how difficult this is OP for you and for your DH, but the first thing that needs to be done is to take control back of the situation. You and your DH need to work together to support each other.
I hope it works out.