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I think your decision is reasonable. Your s-i-l is now an aunt to both your children, so she should acknowledge her niece with a token gift. It was very thoughtless and immature of her not to do so. It is not the cost, it is the fact that your oldest daughter looks upon her as an aunt, and would not understand the favoritism. Maybe this is her way of controlling the situation a little, and hoping to force more openness than you are ready for at the moment? Sometimes relative adoptions are more difficult because of the rearrangement of relationships. Good luck, and remember YOU are the mother.
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