JMABBY, This is a most difficult question but here are my thoughts. I have twin grands, born early but now doing well. There were several unsuccessful pregnancies previous to that and they are remembered. Parents who have lost children to premature birth, given children up for adoption or who have had child die all remember these children who were part of their lives.
My gut response is to complete your wall hanging of "two by two' and give it to honor both children. One child could be replaced by an angel or left just as he or she is. This may give the mother, father and the remaining child the opportunity to remember the special event in their family of being part of "two".
The loss of a child, just as the loss of any dear person, needs time to heal but we still remember. The remembering will always be touched with a pang of pain and longing but this will become less as time goes by. Now, oh, it hurts so much. Ignoring or hiding conversation about the missing one does not make the pain less.
Your efforts and gift will certainly be a warm remembrance to honor the little blessing that was part of their family for a short time and the little blessing still in their arms. The hanging may or may not be displayed. It may take a span of time for the parents to grieve. On the other hand it could very much be part of the healing process too.
My last thought. If this makes YOU feel too uncomfortable set this gift aside. It could be given later when you know the family is feeling better.
I will be praying for this family. Broken hearts need special care.