First off, you said you were thinking of having a chat with him to let him know what's going on in yoru head. I think you definitely need to do that. You also need to ask him to tell you if there is any further contact with her because you absolutely need a united front.
Regarding the grandchildren:
This really is difficult. A toxic person is very dangerous, including to your small children. On the other hand .. ye, it is a pity to have no contact at all.
But it may be necessary. Toxic people are indeed poisonous including to your children.
So that's option 1. No contact at all.
Option 2. very very limited contact. Possible a text back from your husband "they are well" and but then keep very cool, don't get drawn into convo (no need to say more than they are well). Allow text contact once a month or something. But at the first sign of manipulation or trying to draw you back in, cut all contact dead. "I know you want nothing to do with me, or talk to me," could well count as that manipulation or you may feel that you can overlook it. You know her best. Go with your gut instinct - and discuss it with your husband every decision.
Regarding christmas, count on nothing (if you cut her out of your lives, you can't expect anything from her!). If she deluges you with gifts, then that's clear manipulation and yeah, rejecting them is best. If she manages small, appropriate gifts that may be a reasonable sign. Maybe a thank you letter would be appropriate from your children. Def avoid a phone call. Regarding giving them gifts, I would think not.
The danger with even very limited contact is that she will probably try to draw you back in. She may fake reasonable for a while, but it's highly likely the games will begin before long. Not impossible that she will become better, but highly unlikely indeed. (speaking from experience; after 5 years No Contact initiated by me, the extraordinarily abusive family member in my own family apologised and always trod extremely carefully around me, becuase she did want the very limited contact I allowed after the apology. I think I was the only person she didnt try to manipulate because she knew I would walk away. Even so had we been closer, she'd have tried to get me under her thumb again becuase she simply could not help herself).
Option 3 - resume contact. Noooooo! :)
How will your husband react when he realises that this is a final decision on your part? How will you handle it together?
I would not consider any further contact as 'one last chance' becuase that reads a bit as implying that there's a risk things might go back to the way they were. If there is a future relationship possible, it has to be from a totally new basis - one where, in dealing with her, you call the shots and are in control. In the past she's clearly browbeated you and giving you the runaround, headaches, and grief with husband. If, if there is to be any further contact, it's got to be on your terms.
In your shoes I don't know if I would reply to the text or not. Possibly not, actually. It seems too soon for her to have texted. Give it 6 or 12 months and then extremely limited contact, perhaps. S'pose that's Option 4 =)