I guess the thing I'm not comfortable with from an etiquette standpoint is truly that they don't care if DD has an iPad, but they want to use it so they want it to be for the family. I think it's a little unfair to place that kind of a requirement on a gift giver. I think it's within the bounds of etiquette to say no to a gift they do now wish their child to have. I think it's okay to SUGGEST it would be a great gift for the whole family. But if Grandpa still wants to give it to DD solely, isn't that his perogative? Then it is up to the OP whether or not she is comfortable using it as well, but that's sort of her issue not Grandpa's.
POD. Since when is it OK to dictate the terms under which someone gives a gift?
It's not as if the FIL were giving the child something dangerous or that the OP is completely opposed to. It's not as if he were undermining her parenting or encouraging something OP is firmly against. He is giving the daughter something he knows she will use and appreciate, and something that will grow with her. To say "we can only accept that as a gift for all of us" seems inappropriate to me, especially when there is already one in the household.
Either tell him you can't accept it at all or accept it as it's given, but don't try to dictate the terms a gift can be given under.
I don't understand how an iPad isn't an age-appropriate gift when the whole point is that it can be tailored to the user. There is nothing inherently inappropriate about an iPad, and comparing it to a product aimed at adults that cannot be tailored is comparing apples to martians.