Goq,
I didnt read everyones advice, I just read your OP and your final post. I dont think its “wimping out’ I think thats the smartest decision.
Should you confront your niece (even in a nice way) she will probably go and tell her parents. What to parents do when they feel their children are under attack? They protect them, even if they are wrong. So, unless you have the wherewithal to deal with a likely family feud I say leave it be.
You sound like a man who has overcome much adversity in your life, and we all admire you. Hopefully one day your niece will too.