First, I think there's a difference between mental illness and getting the cold slap of reality, which is sometimes what happens with the 'delusions of grandeur' parenting you describe.
That said, the delusions of grandeur parenting is also a hallmark of narcissistic parents. They impose their desire for success on their children so it reflects back positively on themselves. (Their children are not their own persons, but an extension of the narcissistic parent's self.) To be very clear, too -- I am *not* saying your FIL was a narcissist, this is just an observation. However, if he was, children of narcissistic parents do struggle a lot as adults.
Getting to the other end of things-- there's a good book available called The Self-Esteem Trap, which discusses the problems with the parenting-trend of "you can do anything, you are special". And yes, being raised with parents who do not introduce some reality into those discussions of the child's future potential can really mess a kid up too. Mindlessly being a child's cheerleader is not the same as being supportive and celebrating their accomplishments -- and then giving them gentle encouragement to move forward toward their reasonable, achievable goals.
I think you have a very good awareness of the differences. And you will do your best to keep them safe, knowing the difference.
If you are concerned about the possibility of mental illness affecting your children, this is probably something to discuss with a professional. I don't think most of us are 'trained' to give you the information you are seeking. Balanced parenting certainly puts our kids at a better advantage. I'd talk to a pro about what sorts of things which might be an indicator of mental illness-- overall, though, I think a grounded approach to encouraging a child-- really assessing where their talents are and discussing effort and practice and discipline is better than 'pie in the sky-- golden child' parenting.