In 2005, my grandfather ped away from complications due to diabetes ...?

You're absolutely correct! What a nasty old hag to be complaining about such a ridiculous thing. She should have never given cash if she had stipulations behind it, she should have offered to write a check towards a debt or funeral expense or purchased a gift card for God's sake! I think what you did with the money was very noble and that your Grandfather would have appreciated it. I would tell her that paying the money back is simply not fees able as it's been donated at that she'll have to deal because it's what your Grandfather would have wanted. Terribly sorry for your loss, good luck to you and your family.