I told my (then) 5yo that mummy was either going to have a baby, or that I was going to be poorly, once I realised I was PG. I had had a number of MC's before dd arrived, so knew there was a good chance something would go wrong. I figured tell the truth or risk her sensing something was wrong and feeling responsible.
Also, due to a lack of childcare, she had to come to the hospital with me for a few of the appointments, so in the end I told her.
Mummy had a baby growing in her tummy. When it first starts to grow it isn't really like a baby at all...it's a little collection of tiny pieces that will eventually make a baby. With mummy, that didn't work out properly. The little pieces didn't fit together, so mummy was poorly and the hospital took al lthe little pieces away for me.
I'd be sad for a little while, but it wasn't really too bad as I'd got one big girl already and that made me really happy.
She didn't ask me many questions then, but she occasionally asks me about all the babies I didn't have. I always say that having babies was just something I was a bit rubbish at. Ideally, I'd have liked her to have lots of brothers and sisters, but that didn't happen. And if we hadn't lost the other babies, we might never have had her! And that would make me sad.
Her (then) 6yo head (going on 60) said, but it wouldn't really matter, would it? Because I wouldn't have known her! So I said that was true, but now I do know her, so we don't have to worry about it.
Sorry...I've just realised I'm rambling, but hope this helps. So sorry for your ex SIL and for your DD who now has to face grief (possibly) as a result of Mad MIL's inability to keep gob shut!