Hi again WishItWouldSnow.
I was rather astonished at my sisters thong incident as well, as was my DH. He created his own boundaries after that incident and would go out when she visited or find some shed/garage task that needed doing.
I may not be the best person to advise on how to install boundaries and keep contact though. I started no contact 18 months ish ago with my sister and I think I finally may have achieved my goal. I never received any Xmas cards from her this year for my DC's so I think my boundaries are established although they may be a bit severe for you.
Before this though I tried to keep things very low contact and superficial, talk about the weather, her job, her latest ripoff scheme, her DC etc etc.
I never left her in charge of my DC's alone. This was to prevent them being manipulated into pitying poor old auntie, who had such a hard life but would shower my DC's when they were small with lax rules and gifts, whilst telling them if they were her DC's everyday would be like that - a free for all and full of presents! .
I stopped opening my home and rescuing her from what I was lead to believe were terrifying relationship situations. I had her living with me many times over the years for up to twelve months at a time with her DC, during these times me and DH also helped to support her financially.
I refused to accompany her on visits to my parents so I could play the 'buffer' between them all. She is terrified of them knowing who she really is (they already know though through things people outside the family have told them).....she plays the 'Goldenchild' within our family and no-one can be bothered with the drama/fallout to challenge her...she put me in the role of the 'Scapegoat' along time ago. (There are reasons for this to do with my sister's toddlerhood, Grandparents created these roles not my parents, I can't say much more just in case I reveal too much and end up being stalked again!)
Basically I suppose I just stopped covering up for her and made her face the consequences of her own actions within her life. I have never told anyone involved in the family dynamics her 'secrets', they aren't my 'secrets' to tell, so whatever her consequences are - she will not have me to blame them on.
When she used to visit I started to realise my DC's would leave the room and go and play elsewhere. When she left they would appear half way down the stairs asking if she'd gone and could they come down? This is when I realised my gut instinct was right and I needed to stop all this, she made my children feel unworthy in their own home, all because they didn't worship her as they did when they were toddlers. So I limited her visits to times when my DC's were at school. Then she pushed my boundaries regarding when she could visit...big hoohaa and no contact ensued.
For me setting boundaries involved putting my needs and my immediate families needs before hers. She was welcome to visit but only when it suited me, she just couldn't/wouldn't accept me taking charge. I was never rude, I never told her she could only visit when the DC's were at school. I told her it was more convenient if they were at school as I could then give her my undivided attention! When it came to visiting my parents somehow I was just always busy when she wanted to visit. I always asked her what days and times she wanted to go first, before volunteering any of my plans. As for leaving her alone with my DC's (or not as the case maybe) I used to tell her they were so naughty and high spirited that really it would be so much better if there were two adults to look after them! Gosh I was crafty!
Behaving like this did keep the peace for while but it was almost like she had to push my boundaries until I snapped...I suppose that way she has another pity me story to tell anyone that will listen.
Oh well at least I won't be emotionally vampired this time listening to her woes for hours/days/weeks on end!
I do wish you loads of luck with this, whatever you do will not be easy, but perhaps if you play to her ego as I did with my sister you may achieve some sort of non antagonistic relationship.