Offer a beneficiary other than solely the kids, but other than her. That should tell you all you need to know about what her motives are. I do think there is something to be said for setting it up so that a young adult can't access their funds, without some input and control from a custodian, until, say, age 25.
I suspect that THIS:
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Then she said we need to get together and talk soon away from the kids...
Has something to do with THIS:
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Then the next evening one of my female friend came over to clip my dog while she was here and we had a great time. I was nothing but charming and funny (with the friend) while acknowloging my W occasionally when she interjected.
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Then Friday night after work, I met up with a friend of mine who I haven't seen in years and hung out at a bar and grill. It was very nice! Also doesn't hurt that she's a very cute redhead. Nothing ever happened there nor will as she is married (as am I so far). I know this got the W curiosity up since I didn't come home until after she'd left.