A lot of people have suggested hand/footprint crafts, which I agree makes a great gift. You can get frames that hold a picture on one side and plaster for the handprint on the other. I did that with my son when he was 6 months old, so it can definitely be done with younger kids. One hint - if you look for a dog paw print frame, they are exactly the same thing as the child handprint ones but about half he price.
I also have 2 other ideas. First, if you have a good picture of your daughter and mother-in-law, you could have a sketch or drawing done of the picture. There are places on line that do that and the prices didn't seem too bad to me (and I'm pretty frugal right now).
Also, I got my mom a grandmother journal. It asks specific questions about what she was like growing up, what her parents were like, what kind of jobs she's had, etc. It's a gift for her because it gives her an opportunity to tell her story, but it's also a gift for your daughter because she'll have something special from her grandmother when it's done.
By the way, it's very nice that you have such a supportive mother-in-law. So many people complain about in-laws, it's nice to hear something positive.