It must be very difficult for your DH to accept. If his DF has drunk himself to the point of developing Korsakoff's, and his DM is going the same way (by the sounds of things), I really believe there's no helping them now. The damage is very much done.
DF won't be rational, his mental condition won't allow him to be, and the fact DM facilitates his drinking even now means it's only going to snowball. She sounds like an extremely manipulative woman with absolutely no regard for her husband's long term health, as that means she'd be minus a drinking buddy and it'd also mean she'd be forced to confront her own alcohol abuse.
Speaking as someone in recovery, you don't want these people around your DC unattended. At ALL. They're very much entrenched in their own self destruction and simply won't have the capacity to look after the DC or attend to even their most basic needs, regardless of how independent the children are.
Your DH is in a difficult situation (as are you), especially if he's had a lifetime of being manipulated and guilted by his DM. I absolutely agree that any contact must be on YOUR terms.
Rehabilitation only works if you want it to. If your FIL was already showing signs of Korsakoff's when he was in rehab/being detoxed, it must have been very easy for your MIL to coerce him into picking up the bottle again. There's another condition that's sometimes co-morbid with it - Wernicke's encephalopathy - and he may have or still have symptoms of that.
I think your DH is going to have to accept, if he hasn't already, that their health is only going to deteriorate. Have there been any symptoms like jaundice, vomiting blood, or abdominal swelling? Weight loss or hair loss? These are signs of end stage liver failure, which you probably already know. They may already have cirrhosis with no or few symptoms, and it's a condition that can escalate dramatically with no warning. What if your DC were in their care, and one of them collapsed or began vomiting blood (a frightening sight they won't forget, believe me - I know someone who lost 7 litres of blood that way, from her first bleed)?
It's so difficult. You need to stick to your guns. I'm so sorry there's not more I can do to advise, and I really don't wish to alarm you with regards to possible scenarios, but sadly they're all too common amongst alcoholics at their level.