I am sorry this is so stressful for you, but completely understand. Did you tell the insurance company that your Father-in-Law had passed as well? You will get conflicting answers on this question. Some people think that if the person getting the ins. money is dead it goes to their Estate, others that it goes back into the insured's estate, and their heirs at law inherit. Don't freak by what the attorney says yet!! It may not be correct. The insurance company is going to tell you what they want to do in this situation.
So if they told you that they want to pay to the Estate of your Father-in-law ask them if that is how the check would be issued, "Estate of John Doe". Because if it is, then you will have to reopen Probate for your Father-in-law. This is not the best idea. Again, the insurance company is going to have procedures in place for this very thing.
Now both your sister-in-law and your Husband could disclaim and it would go to your brother-in-law's Estate, but that may not be the best situation as it would put the money under court supervision, and you have the Chapter 13 issue. If your sister-in-law had the money she could spend it as she saw fit, or put it into Trust for the boys. Remember she is under no legal obligation to give the boys any of it, just a moral one........
If he disclaims the Trustee would not know about it unless he told them, but he is under an obligation to tell the Trustee unless he has been discharged. Not doing so could result in dismissal of the bankruptcy, if they did ever find out. It is only his portion that would be in the bankruptcy as well, the sister's half goes to her. However, I have been looking into this and Virginia Ann. Code § 64.1-196.7. Disclaimer of interest by trustee.
If a trustee disclaims an interest in property that otherwise would have become trust property, the interest does not become trust property. This means that even if the property does become the property of your husband, and thereby the Trustee, the Trustee can disclaim. Another words, the Trustee does not have to take the money, and in this situation just may not.
To answer your question about inheritances in bankruptcy. Yes, there is clear law on this, and property that is received during a bankruptcy is subject to seizure by the Trustee. That is an easy one to answer. If your husband just received this and there wasn't the other issues he would have to turn that money over to the Trustee by law.
However, this not going to be an easy answer. You will have to talk to the insurance company and you are going to have to talk to an Probate attorney. If you don't want to talk to your banruptcy attorne yet, that is fine, but you will have to if your Husband is in anyway involved in receiving the insurance proceeds.
I still believe that the insurance money will revert back to the insured's Estate if all beneficiaries are deceased. Once he passes you will have to open Probate, a guardian of the children will be named and a Personal Representative of the Estate. You could fight the insurance company if they try and give it to your husband and sister, the Estate could make a claim. This is where talking to a Probate attorney would be helpful.
Next thing I would do is call the Insurance company and tell them all beneficiaries are dead, the family wants this to go to the insured's Estate so the children get it. (now remember if this happens the money goes into court supervision), and see what they say.