At this stage there are a few things you can do.
I) do a bit of reading on animal behaviour - for your sake and your kids (i'll explain next). Statements like "he knew it was a pet" or "She wouldnt have sex with her brother" aren't helpful when discussing animals.
II) If the kids know what's happened, have a bit of a chat to them about it so they're not scared of him. I wont tell you how to parent but, if they're aware of the situation, it's important they're not scared to be around him from now on.
III) Get some basic obedience going on ASAP if you're not already.Ditto what others have said above. A good trainer / behaviourist who YOU and your family
IV) Try to not put him in that situation again - pocket pets are just a no-no for some dogs. Spare yourself the grief.
V) On that note, try to not reinforce the behaviour. e.g. No more tug with small toys which squeak. http://blog.k9pro.com.au/5-tips-to-h...ug-like-a-pro/
I'm very sorry you lost a member of your family, but at this stage you need to work extra hard to prevent this happening again.