I do feel sorry for the two children, who are caught in the middle of something which is absolutely not their fault. LW's adult daughter has the right to share if she chooses. I'd advise her to hold on to some of it, too, though.

I'm a little confused by one thing--"He married his affair partner before the divorce went through"--if that's the case, those poor kids aren't legitimate, and the guy was a bigamist. But that makes absolutely no difference to the main point of the letter.