I'm sure your niece is thinking it needs to be cared for carefully and saved til he's "old enough to appreciate it properly" (or at least that was my mother's way of thinking). Unfortunately by the time I got her favorite childhood doll at age 12, I had no interest in dolls anymore, and didn't really care about it as a keepsake for another 20 years or so!
Is there some way you can express your feelings to your niece explaining that you wanted him to enjoy the use of it as a connection to Papaw, not as an heirloom to be put away and saved.