The very best thing you can do you already are. Just being there and loving him.
My DH suffers from severe health anxiety (hypochondria). As we've slowly pulled back the layers he also has depression and anxiety.
Through counselling its come about that his mother was very abusive to him in childhood, particularly in early adolescence. She is not a coper (sorry spelling is not a strength of mine) and he is the eldest of four children.
The family became known to social services when he started secondary and a lot of pressure was put on him to be the adult in looking after the others. His dad worked very very long hours and wasn't around much, he was made redundant when DH was early teens, had very significant health issues thereafter and died when DH was just away at Uni.
DH had buried a lot of what went on and it was nearly thirty years later that he started to remember some of what happened.
As an adult, and parent of a four year old DD, step parent to an Autistic 11 year old and 9 year old, he can see how what was said to that little boy (him) was very wrong.
He's starting to see how its affected him significantly growing up. It stopped him having any real relationships until me just before turning 40. His brothers are all messed up to. One lives far side of world virtually no contact, one is a paranoid schizophrenic (mum covers up for some of his paranoid acts and is in parallel very scared of him, like violently attacking very elderly next door neighbours) one is virtually no contact. We are now fully no contact after paranoid brother did some things that resulted in him being sectioned then, restraining orders, court, and ultimately us moving areas.
Going no contact for us has been the biggest thing for DH. Out from under the shadow of gloom he grew up in, he's grown in self confidence, he is less anxious as a result, he is able to talk more freely about his life.
He did a course of mindfulness training which has helped him to better understand his triggers and reactions. He's also done cognitive behavioural therapy which has helped him understand and take more responsibility as an adult for his own actions.
Its quite funny in a way. He's become much stronger and where he would never argue before, just get defensive and dismissive, he's learning to enjoy debate and reasoning things through. He challenges me/ my opinion now which I love and hate in equal measure. It has led to a much more balanced relationship.
Going no contact is a major step and it really doesn't sound like a necessary one from what you've posted. Taking control of contact and accepting your MIL as who she is on the other hand would be very desirable. Does your DH seek approval from his mother still to validate his own sense of worth from achievements? Thats the sort of contact cycle you need to look at breaking. If she isn't able to offer it thats just how it is.
Anxiety/ depression/ paranoia do seam to have strong familial links. Some elements I understand can be learned behaviours but others are quite possibly genetics. Do you think its possible MIL is also a big depression sufferer? Not trying to excuse her behaviour or justify it but could it go some way to explaining it?
You mention about your DD's special day out to get a pet. Having Granny involved is a lovely thought but with hindsight are there different ways that sort of situation could be played out so that Granny is involved still but not pivotal or able to take away from the event by being 'busy'? Could she have come for tea afterwards or could you have popped in on your route home?
The first and biggest step with depression is recognising it. The next step is starting on the road for treating and controlling. Its a long old path but life is an interesting journey of twists and turns. DH and I have learnt so much about each other/ our relationship through the counselling it has made us stronger and more of a team.
I don't blame DH's mother. The little I know about her upbringing it was also pretty abusive. She started investigating the family tree and both her grandfather and great grandfather appear to have died in psychiatric type/ special hospitals so how far back does one take blame? We all need to take control of our own destinies and it sounds like you're doing just that.