I agree with the statement about perhaps talking to your in-laws at whatever your next meeting is. I'm not sure if you get together for holidays, monthly dinners, hang out, etc. but as long as you are up-front and honest, I could see it going well. Here's how I would frame it:
1) Thank you! Start by expressing how thankful you are for that gift. That's a big one, and you can let them know that for 3 years now it has been a great thing for you and your family.
2) It served an important need. You can transition the conversation to how that gift addressed a big practical & financial need by reducing your potential costs by eliminating the need for carrying a car payment. I am guessing it has also been pretty reliable, as it's a late-model Toyota, so it also eliminated your maintenance costs, which further improved your stress levels and finances.
3) Stepping stone to success. The RAV4 has helped you get a solid footing and you have learned important financial lessons that you would like to build upon. That RAV4 set the solid foundation that you're building upon, and the next phase is to transition to a more fuel efficient vehicle. By using it as trade-in for a more fuel efficient option, it's like the gift that keeps giving, as it taught you the value of having a reliable, paid-off car. You're now taking it to the next level by going with an even more fuel efficient car, while building on that solid foundation of having a reliable, paid off car that your in-laws made possible with their gift.
Now is all of this true? Probably. Maybe. That's up to you. At the least, you can see how if you frame the conversation like this, they can see that you're thankful, it served an important need, and it's the solid foundation you're building your financial future with. You can frame it like I did and essentially give them credit for teaching you the value of having a paid-off car. It's up to you. In-laws can be difficult sometimes, but most people like to be thanked and told how important they are. Parents in particular like to hear that they have successfully taught their kids something that is helping them for years after.
Plan B: You just do the trade-in and don't care what they think. If they bring it up, you thank them and show how their gift lives on, in that the RAV4 made your current car possible to own without a monthly payment.
