Spreewald

Spending a few days in the Spreewald makes sense if you are looking for tranquility. In this case it's recommended to rent a canoe and explore the area by boat. But in my opinion there's so much to see and do between Dresden and Bautzen that you should limit yourself to the usual trip by boat (in a punted barge) from Lübbenau to the Sorbian museum village of Lehde.

But it also matters where exactly her ancestors came from. If it was a Sorbian village you can learn more about their heritage in the Spreewald, if it was a German village you should focus more on Upper Lusatia, i.e. the area between Kamenz, Görlitz and Zittau.

I would recommend to use two bases: one in the Elbe valley, one in Upper Lusatia. If you are serious about hiking I would recommend Pirna, which is a cute historic town halfway between Dresden and Saxon Switzerland, and close to the Autobahn, as the first base. From there you can easily access both Dresden and Saxon Switzerland (+ Königstein fortress), but also Pillnitz Palace or the Müglitz valley with Weesenstein castle and Glashütte (where all the super-expensive watches come from). It's also relatively easy to get to Seiffen in the Ore Mountains, a village with nothing but Christmas shops all year round, which is highly recommended.

Bautzen is a good base to explore Upper Lusatia.... the town was actually the "capital" of the region. Bautzen and Görlitz are must sees. I would also recommend to see the Zittau Mountains. The highlight there is Oybin, a small village in a beautiful valley overlooked by the ruins of a castle (of Bohemian king and German emperor Charles IV) and a monastery on a mountain that looks like a bee hive.
Another highlight of Upper Lusatia are the villages in the southern part of the region, which are famous for their so called "Umgebinde" houses. Most of them are difficult to reach by public transport, but since you travel by car I highly recommend to see them. The most beautiful villages are Waltersdorf, Bertsdorf and Großschönau in the Zittau Mountains, and Obercunnersdorf, halfway between Bautzen and the mountains. Close to Obercunnersdorf is Herrnhut, home of the Moravian church.... where the Moravian stars are made.

If you tell me where exactly her ancestors came from I could probably tell you more.

We spent several nights in the Spreewald on the canals near Lübbenau. Other than the canal boat ride there was not much going on. Lots of tourists there for the day then gone (bus tours etc). At night (18:00) most everything closed including many restaurants. I would spend only one day/night there. Honestly I can not remember the name of where we stayed, but I went old and rustic and got old and rustic with huge spiders on the balcony. We could watch the few night lantern lit canal boats go by at night though. I would say as you mentioned time is better spent on the Elbe in the Sächsische Schweiz. The hills are really unique there and many are protected reserves. I liked the castle Königstein and the steam ship on the Elbe. Close to Bautzen are the cities of Meissen and Gorlitz also better time spent. We stayed in Bad Schandau on the Elbe and in Meissen, but I can not recommend any particular place to stay.

Thanks for the suggestions. I appreciate it. My wife's family came from villages east of Bautzen called Niedergurig and Malschwitz. We have visited there one time back in 2009 but would like to return again. Her family's records are actually contained in a small Lutheran church in one of those villages.

In 1999 I went on a day trip to the Spreewald area from Berlin, visited Lübben and Lübbenau, didn't get to Cottbus. Between the two Lübbenau was more interesting...historically too. Mainly, I explored the towns.

My wife's family came from villages east of Bautzen called Niedergurig
and Malschwitz.

These villages were Sorbian in the 19th century, but AFAIK not anymore. Today most Sorbs of Upper Lusatia live in the small villages between Bautzen and Kamenz, with Panschwitz-Kuckau as the centre, where one (use Google Translate) of the two Catholic monasteries of Upper Lusatia is located. Nearby is the village of Ralbitz, which has a picturesque Sorbian cemetery.
But unlike the Spreewald, the very touristy region where the Sorbs of Lower Lusatia live, the land of the Sorbs in Upper Lusatia stayed rural, remote and untouristy, that's why it's difficult to actually experience Sorbian life as a tourist. The best chance is Easter, with the Easter riding processions, Easter eggs or the Easter Egg rolling in Bautzen.

BTW: a real highlight nearby is the small rural town of Pulsnitz, which is known as the Pfefferkuchenstadt, or gingerbread town. Several small bakeries there produce nothing but gingerbread all year round... and not just for Christmas like in other regions. The German Wiki has a long article about gingerbread from Pulsnitz.

visited Lübben and Lübbenau, didn't get to Cottbus. Between the two
Lübbenau was more interesting...historically too. Mainly, I explored
the towns.

Lübbenau is the best option in the region. Cottbus is nothing special, but offers a very good English landscape park (Park Branitz), which was designed by Count Pückler. His second park, Muskau Park, is equally interesting... and a World Heritage Site (the article uses outdated pics of the castle, which looks much better today). Highly recommended since you travel by car.
Nearby is the Azalea and Rhododendron Park Kromlau btw., which became quite popular in the last few years bc of he often shown Rakotz bridge.
Both parks are connected by the nostalgic Waldeisenbahn (Forest tain).

Thanks for the information and the suggestions. We booked a hotel in Lubbenau near the downtown area and will be there only one night as we journey from Dresden to Berlin. I am checking on renting a car in Dresden to visit the small villages where my wife's relatives lived before they came to the US in the 1800s. I was hoping to rent a car for one day only and drive from Dresden and look around and then return the car to Dresden and take the train to Lubbenau unless there is a car rental dealer that will allow us to leave it in Lubbenau.