N.M.
I am a social worker on a geri-pscyh unit. I see this all the time. First, there are no psychiatric facilities that you would be able to place her at. The state run hospitals are not typically meant for someone with dementia, even if they also have a mental illness diagnosis. And to get into one you need first to go to a regular inpatient psych unit and then prove to the court that you need a state hospital (not easy), and then wait up to a year to get into one. If she gets hospitalized it would likely be temporary, unless meds could not control her aggression.
The best bet is to call the Ct Homecare Program for Elders 1-800-445-5394 (she would have to be age 65 or older) or try the pilot program they have for the disabled if she is younger. This program can help get her onto T19 or a state supplemental income, but not take away your FIL portion of assets or home. Then it helps to pay for help within the home and adult daycare services. It's aim is to keep people living at home as long as possible.
It sounds as though your FIL does not have money for assisted living. They run about $5k a month.
The only other option is placement within a nursing home. In your area of the state you have Branford Hills, Guilford House, Fowler's. You could also try Regency House in Wallingford. Masonic has a long wait list, but if someone in the family is a Mason then it is worth getting on their list. In New Haven you have the Mary Wade Home, the Jewish Home fo the Aged. You also have Talmadge Park in East Haven, and Laurel Woods. Even if your mother in law does not need a nursing home placement right now, she needs to be on wait lists. Depending on the facility, wait lists can be from 3-6mo, or 1-3 years. CT has very strict wait list laws, even emergencies cannot jump them, so someone who needs placement quick does not end up at a place that is the "cream of the crop". It's best to plan ahead now.
Now, how to support your husband...he's had to live this his whole life and may be bringing back some not so nice memories, not to mention that he cvan be falling into the "family roles" they had when he was growing up. He's right, it's not a fixable problem, this will only get worse, not better. The best thing you can do, is listen, do what he allows you to, but remember it's his family not yours, you can't fix it or take over. I'm sure it's all stuff that you know from your own profession. He may not be too thrilled with the suggestions I gave you, but honestly no one ever is. However, being prepared may be the only way you can help.
Good Luck!
p.s. in CT the look back period for real estate is now 5 years (since Feb 06). The Alzheimer's Association has a list of elder care lawyers on their website www.alz.org/ct