So sorry to hear your MIL is ill.
We're in a similar situation, my dd is 5 next month, and my dad is dying from cancer, although we don't live with them, we do have a lot of contact with them.
DD knows all about whats happening with my dad, she knows he's got a nasty illness called cancer, that makes his body stop working properly, and that he's going to die soon. We've been told we're into the last 2-3 weeks.
I've used some books with her that have helped, all from amazon, where if you search childrens books for 'bereavement and death' you get loads of suggestions.
We've found 'The Huge Bag of Worries' by Viginia Ironside good for talking about feelings and how to deal with feeling worried and scared.
We've also got Always and Forever by Alan Durant, which has me in tears every time we read it- lovely story about an animal family, fox dies and everyone is very sad, but springs comes again and everyone starts to remember the good things about fox and feel happier again.
'A Place in My Heart' by Annette Aubrey is also good, specifically about a grandad dying, but gives good messages about remembering people and talking about feelings.
I goe Michael Rosens Sad Book as well, which is just gorgeous, but more for me than DD!
We literally got the books, chucked them on the book shelf, and read them as we do any other books we've got. DD does seem more settled and relaxed about it all since we went through the books, and if she is having a bad day, we get them out and look through them. I had to practise reading them myself so I could do it with minimal tears!
I know Macmillan and cruse offer advice to parents about dealing with bereaved children, so that might be worth a google too.
Sorry for huge post! 