RE: Struggling with guilt...
I don't think you should feel at all guilty. As I work toward the goal of simplifying my life, I've had to learn to let things go - including unwanted objects (knicknacks or gifts) that don't add beauty or functionality to our home. It's ok to accept a gift in the spirit in which it was given, thank the giver kindly, and then find the gift a home where it WILL be used and enjoyed. Sometimes that means Goodwill or ebay, if the gift doesn't happen to suit your taste or lifestyle.
Maybe next time, snap a quick photo of DD wearing the clothes (so MIL gets to see her enjoying them) before you re-home them.
Cindy, Mommy to DS 2/04 and DS 2/08