What a wonderful family trip you're planning! I've spent quite a bit of time around Sintra and the coast, and I think this area could be a great fit for your group, especially since you're traveling with kids and grandparents.
The other replies are spot on about Porto and the Douro, but I'd also make a strong case for spending at least 2-3 nights in the Sintra/Colares area. It has a little bit of everything you're looking for.
For the kids and grandparents, Pena Palace really does feel like walking into a fairytale. I think the 11-year-old will love it, and there's plenty to explore in the surrounding park as well. Quinta da Regaleira is another great one with its tunnels, towers, gardens and the famous Initiation Well. Then you have the coast nearby. Praia das Maçãs and Praia da Adraga are both beautiful and relatively easy to combine with a day around Sintra and Colares.
For the foodies and wine lovers, Colares is particularly interesting. It's one of Portugal's historic wine regions, and some of its traditional vineyards are famous for vines grown in sandy soils, including rare ungrafted vines that survived phylloxera.
Speaking of wine, one place near Colares that's really worth looking into is Quinta Vale da Roca. It's a small working vineyard and boutique estate overlooking the Atlantic, so the experience feels much more personal than visiting one of the larger commercial wineries. They produce their own wines on the estate, including wines from Malvasia de Colares, Arinto and Pinot Noir.
What I particularly like about it is the setting. You're surrounded by vineyards with the Atlantic right in front of you, and it feels incredibly peaceful despite being so close to Sintra and Cabo da Roca. You can come just for a wine tasting, walk around the vineyard and spend some time enjoying the views, so there's no need to stay overnight. But they do have accommodation on the estate, which could be a nice option if you'd rather slow down and spend a night in the area instead of driving back to Lisbon.
Location-wise, it also works really well for a family itinerary. Cabo da Roca is only a few minutes away, so you can easily combine the vineyard with Cabo da Roca, Colares and some of the beaches along the coast. For a group with different ages and interests, I think it's a nice compromise. The wine lovers get something genuinely local, while everyone else gets the scenery and a beautiful place to relax for a while.
For traditional music, Lisbon is probably your best bet. I'd look at Fado houses in Alfama, although with younger children I'd probably choose an earlier or shorter performance rather than committing to a very long evening.
Overall, I wouldn't treat Sintra as just a quick day trip from Lisbon with a couple of palaces checked off the list. With your group, I'd slow it down and give the area a couple of nights. Between the palaces, Atlantic coast, beaches, local food and wine, there's enough variety that everyone can get something different out of it.
Have an amazing trip!
