Thank you for writing. I can’t answer your question any better than your therapist can. Neither of us have enough information to do so. We would have to talk to her. But I can ask you this: What difference does it make if she is or isn’t delusional? I wish you had included some indication of why labeling her behavior matters to you. Regardless of label, you have plenty of information to make reasonable decisions about your relationship with her.
Whether or not she is delusional, you already have enough experience with her to know that you should keep your distance. You already know that it is unwise to ever get financially entangled with her again. You already know here is no point in arguing with her. She won’t be confused by facts. She won’t respond positively to any effort by you to connect with her. She is getting something out of her narrative about you and other members of the family that is in some way important to her.
If a relationship to your niece and nephew is important to you, time is on your side. Although it is sad that you are missing out on their growing up years, they will eventually be adults and will be able to make up their own minds. If they are already young adults, you can try contacting them to see if they would like to know you.
Situations like this are painful and frustrating, I know. It’s hard to accept it when someone makes an unfair and negative judgment about us; especially if they try to pull others into that assessment. All you can do is love her from a distance and be willing to connect if she eventually comes around. Meanwhile, focus on the positive family relationships you do have.
I wish you well.