If my daughter should die before she & the finace marry, who is entitled to custody of the children?
Children and/or grandchildren are not property. Children are living, human beings. Children can't be inherited. However, a willing, competent, and capable relative can be awarded emergency, temporary, or permanent custody.
However, the answer to your query would be an eligible, willing relative of the child(ren) who stepped forward upon the death of your daughter.
The relative could be you, your daughter's sibling, an aunt, etc...
The unmarried male living in your daughter's home upon her death would not have any legal standing superior to yours to seek custody of the children, even if he were married to your daughter.
Yes, grandparents are regularly awarded custody of their grandchildren. They obtain custody for a myriad of reasons these days.
Again, stepfather or stepmother has no legal standing equal to or superior to yours, such that one or the other would be awarded custody. The various state child agencies and the courts seek to keep families intact, especially if a parent dies or is sentenced to a prison term.