The quilts we make and gift are filled with love as well as batting. If you want to make your niece/nephew a quilt filled with love you should do so. If you feel it will be hidden away at niece/nephew's house feel free to keep it at your house. If they live near enough you will be asked to baby-sit. The first time you baby-sit you can gift the quilt 'after' the parents have gone, use it while she/he is at your house and keep it when she/he goes home.
You may even have an opportunity over time to be spiteful if you choose. SIL: "Where did she/he get the quilt?".
You can then remind her she didn't want it because it didn't match the nursery decor.