Wow, I am so very sorry for all that you are going through with your daughter. I simply cannot fathom the turmoil, the worry, the stress you must be under every day. I really do hope you and finace find peace in your decisions and are able to make a healthy, happy, secure home for your daughter.
I am not a grandmother by blood - I am a grandmother by marriage. But I could not imagine loving those 2 little munchkins any more than I do, and I would give my life to protect them. Even though they do not live with us, their well-being is always in my mind and my husband and I would do anything - ANYTHING - to make certain those children have all they need.
That being said, I cannot give you any legal advice. However, as to your daughter's grandfather, I simply cannot imagine the pain, the agony a parent must go through when their child dies - no matter the manner of death. I would expect a parent who loses a child (minor or adult) would become a little crazed. I don't know your daughter's grandfather, but I would expect him to have "issues," after his daughter had committed suicide. My first question would be: is he in therapy?
I would also expect he might be in some denial over his granddaughter. After all, if his daughter's mental illness played a factor in her demise, he certainly isn't going to want to see the same potential in his granddaughter, would he? And I would take issue with a therapist who would rather a grandparent just leave as opposed to suggesting the grandparent also join therapy to overcome his issues and regain rights to visitation.
Now, if you simply do not want your daughter's grandfather involved in her because you don't like the man, or he reminds you or your fiance of the child's mother, or some other type of reason, well, that's your decision. The courts, from what I've been able to determine, are not very favorable to grandparents. However, if you truly think grandparents can add value to a child's life, there are ways to work this through. Granted, you can make demands, such as therapy/counciling, must be in your presence, length of visit, etc. It can take a long time for a parent to get to a point where they can move on from the death of a child - has this man reached that point?