I know I'm going to sound a bit blunt here, but IMO DD1 lost the right to dictate what happens to the equipment & clothes when she behaved in a way that meant her child was taken away from her and adopted. It's not like they will go to her child because a) child is no longer a baby and b) child lives with her adoptive parents anyway.
I would view it as you bought the stuff for use by grandchildren - whichever one(s) happened to be living or staying under your roof at the time. I know in almost every family I know, children get hand me downs from older sibling & the same kit e.g. beds, bottles, clothing and so on went through all 4 of my nephews. Gifts I gave the eldest I would see being used by the younger ones over time as one grew out of them and another in to them, and there was rarely any possessiveness among the boys for that kind of thing either.
She will probably be tangled up in so many conflicting emotions that she can't (and won't) think rationally. Guilt, defiance, jealousy, wanting to be the only really important one. Missing her child but at the same time relieved to no longer have that responsibility - leading to yet more internalised guilt for feeling that relief.
I can see why you don't want to upset her, I've read enough here to know she can be a bit wayward and fragile at the same time. But to be blunt again, she's sort of had her share of time, money and consideration and now it's DD2's turn to get the help she needs.
But in the long run, I think DD2 needs to be involved in this. If DD2 would rather go without these things to keep in with her sister, that must be her choice and equally she is willing to risk a break with her sister due to need then again her decision.