This happened to my cousin -- her parents and in laws both smoke. She was pretty strict and gave the old folks an ultimatum. She basically restricted them from seeing their grandchild if they insist on smoking. The old folks are also banned from smoking in their apartment.
It was tough but my cousin is pretty much gutsy to begin with so she literally dropped the hammer on them in this matter as she does not want her child to be harrmed. She also cited examples of other relatives who had died due to smoking-related diseases and this drove the point across.
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