Hi J.,
It sounds like your mother-in-law has a lot of emotional issues and, as a result, is one of those people I call crazy-makers or vampires. They suck the energy and/or happiness out of you.
I would agree with the therapist: both your hubby and you need to take your distances with her. I know it's hard, especially for your hubby, but if she always makes you feel angry/sad/exhausted/unworthy/etc. every time you see her, the key to healing is to make a break so that she at least can't continue feeding the dysfunctional relationship and the negative feelings, which gives you guys a chance to heal, and, once this is done, maybe re-establish a relationship with her on sounder ground.
I understand how hard it is for your hubby to do this; I've been in his shoes, except it was my father. The key to my healing (and us having the great relationship we have today) was for me to stop communicating except for those absolutely necessary times (i.e. I would call him for Christmas and his birthday), work on myself and, once I was in a place where he couldn't hurt me as much anymore, approach him to see if he was willing to re-start the relationship on sounder ground, or not. Turned out he did, and we have a great relationship today, but I was perfectly ready - and in peace with - for no relationship to be possible.
I have one question: Is she the same with your children, or do they love her? Sometimes, people can have very strained and loaded relationships with their siblings and children, but have great relationships with their grandchildren. If this is the case, can you limit your interactions with her to bringing her the children and picking them up? That would be a way to have them enjoy their grandmother without you having to interact with her at more than a basic level.
Hope this helps,
K.
www.dailymastery.com