From a rude-not-rude perspective, I'd say that either offering it back to your MIL, (or another family member) or discreetly getting rid of it is fine. Once you receive a gift, it's yours to do with as you want, and if something has sentimental value to the giver (or is a family heirloom) it can be kind to give them rights of first refusal.
From a family dynamics perspective, though, it depends on how your MIL will react to you trying to give it back. If you think she'll get upset at being told that you don't use it, or try to force it back on you (and notice if you keep it or not), I'd say to go with discretely getting rid of it in a way that she won't find out about, and then if she wonders where it is, you can prevaricate. ("I packed a bunch of stuff away when decluttering, and I'm not sure where it is").
When you've got limited room, there's a definite limit to how much stuff you can keep hanging around to avoid hurting the giver's feelings. If you had tons of storage space, I'd say pack it away, and wait, and if she doesn't notice or ask about it in a couple of years get rid of it (or, for other items, bring them out occasionally). But if you're getting rid of stuff that has sentimental value to you, to keep stuff that has sentimental value to the person who gave it to, you've reached a tipping point, where something has to give.