Just my two cents, but...
1. OP, I would worry a little less about what you receive and your children reciprocating to full value. Unless there is another chapter to the story we don't know or that I missed, such as your sister having a long history of animosity/PA behavior, it's possible she's just doing her best. I have friends and some family who are fabulous people, we love each other, but I receive the most tacky, useless gifts. And yes, some of these are re-gifts.
My strategy is to smile, thank the person profusely for the thought, AND write a thank-you note. As for the gift, well...if it's not going to earn its keep, it get donated. Or...regifted, if it's in very good shape and I know it would appeal to someone. (My grandmother once gave me a fringed leather purse that I *hated* but I knew my now-ex-BF's mother would love. Brand new, still had paper stuffing in it, the purse was her gift and she's still using it years later. Re-gifting isn't necessarily a bad thing.)
2. As for your kids--TootsNYC is absolutely correct. If your kids are old enough, give them a budget and teach them to think about a good gift, shop for one, wrap and send it. It's a good lesson for them that the value of a gift isn't necessarily on the price tag, but in regard to the thought that's put into it.
Basically, her poor choices in gift-giving should be a side note. If you have an otherwise fine relationship
and you're going to exchange gifts, give her whatever you feel like for the sake of giving a gift, even if you receive something you don't like. Don't make this a hill to die on. (You can also find items in good shape at thrift shops, if you want to "even things up.")
Edited to add a point I forgot to earlier.