Re: your itenerary:
I think you pretty much have a great plan. However, I agree that you're short changing Epcot timewise. Not that you need to see everything, but this place is HUGE and actually has a lot to touch and participate in. Also, the majority of the attractions are longer than those in other parks. You can blow by things but you'll really miss the fine details that makes this park so great. I love the street shows in WS. And when I did the park recently with four little kids, they really got into the KidCot craft stations around WS which take up some time. They also liked getting their autograph books signed with personal messages from CMs at every country. It was really neat.
But there's no way you can do everything at Epcot in 1 day. I think we hit about 2/3rds of the attractions going opening til closed. Even when we went back for another evening, we ended up missing at least a half-dozen things we wanted to see and do.
Your other mistake is thinking that you need to do MGM for 1 1/2 days. There is really not that much to do there to merit that much time, not unless you have thrill ride fans who want to go on ToT and RnRC over and over again. The shows are fun but how many do you really want to see?
Two suggestions: 1) since you're talking about doing Hollywood & Vine at MGM, consider doing it as a Fantasmic Dinner Package. This will save you some wait-time headache for the show. 2) Go back and finish Epcot in the late afternoon/evening on either the day you do AK or on your last day (Friday) after revisiting MK. In fact, if you did Epcot to finish up your AK day, then took care of MGM all in one day, that would leave you with all day on your last day (Friday) to revisit MK.
Also, since you indicate a preference for character meals, remember that you're setting yourself up to see Mickey, Minnie and pals again and again and again (Chef Mickeys, Hollywood & Vine, Breakfastasaurus, Garden Grille @ Epcot). There are a few Pooh and pals meals (at dinner at 1900 Park Faire and somewhere inside MK now that Crystal Palace is under rennovation). There's also a junior-league princess thing for breakfast at 1900 Park Faire with Alice and Mary Poppins.
If you're looking for fun places to eat, I'd also recommend trying different restaurants at Epcot. Living Seas is beautiful and affordable for lunch (get pricey for dinner, though). San Angel Inn has the best atmosphere in all of WDW. The Biergarten offers a German-style show. Teppanyaki does the Benihana chop-chop thing Disney-style. And my family really loves Marrakesh, which has a nice belly-dancing show and excellent food. If you're worried about what the kids will eat, rest easy. All these places offer kid meals--usually mac 'n' cheese, pizza, chicken fingers, etc.--so if they don't like the international cuisine, they'll at least have a choice they'd like.
At MGM, your grandkids might also enjoy both the Prime Time Cafe and the Sci-Fi Dine In Theater--although both aren't part of the Fantasmic Dinner Package. Again, two very nicely themed out and very entertaining restaurants.
Around WDW resorts, I'd also recommend Ohanas at the Polynesian (much better and more fun than the Luau) and Whispering Canyon Cafe (offers a lot of cowboy-themed fun and games and interaction with the staff for kids).
Last, I think your breaks/days off are awesome! Trust me, you guys won't be sorry. Everyone will be totally fresher and much more energized going this way. And if you feel the need to do another day at a park and decide to eliminate a rest day, then you can always add another day to your pass and do it.