Lay out what the rules are (i.e. if you want us to attend, reasonable notice is
required, if you want us to chip in on things, reasonable notice is also
required, etc. etc.) then go on to do as everyone else says and ignore their crap. If you don't draw the line in the sand, and draw it so that it is very obvious, then they're going to continue to walk all over you guys, regardless of how you do or don't ignore their games. We had a somewhat similar, though not nearly as serious, issue with The Wife's brother and his ex concerning his kids, and we tried the high road, ignore-them-and-don't-cause-drama path, and it was just as disastrous but in other new and irritating ways. Only after we laid out what was acceptable and what was not, then stuck to it, did they get the message. Some feelings were bruised for a short time, but when we didn't budge, ever, they eventually accepted it and things are fine now. And don't leave your wife to handle it because it's "her family." Being married means you're in it together, always; which of course you know.
Like I said, though, things weren't as severe for us as they are apparently for you guys, but the principle is the same; you can only be the victim if you don't defend yourself.