If his Dr feels that he cannot drive, then he probably DOES need someone living with him. And, yes, it WIll freak him out, but you would be surpeised how quickly he will get over it. Just imagine how bad it would be if he were to become lost. My father did, because I could get no backing on taking his keys away, and it was a nightmare. He was found, and he was alright, but we had a rough time of it until he was.
Honestly, he may start to wander on foot if he cannot drive, and he probably needs someone with him to help him out anyway. AD patients need help with a lot of things, because they simply forget how to do them.

Your father in law probably should not be alone. If he is unable to manage his daily activities now he will need help making sure he eats and takes his meds.
If I were you I'd get in touch with the alzheimers association in your state and also see if there is an independent living center or other organizations that help with forms of elder care. What is avialable differs so much from state to state. I found it pretty over whelming at first and am so thankful we had a case facilitator who helps direct us. Depending on his condition, and what's available in his area, there could be respite care which would offer relief for his primary care givers.

If he is declared incompetent he won't be allowed to live alone. That was what I was told when I wanted to get help for my mom. Your sister inlaw will know you are supportive if you just call and ask about how things are going. They will let you know if there is anyway you can help. Just knowing you do care will make things easier on them. Letting them know if they just need someone to vent to will be good. I will pray for God to help your father inlaw to accept things well.

Caregivers need support - offer to stay with him to give them respite on occasions. Offer to get the groceries on occasion, take him to the doctor, take him out to see his buddies, take him to church or anything else that he is used to doing that he won't be able to. Caregivers become overwhelmed and start to resent others just letting them do it. I agree with calls just to see how things are going too. I really respect your commitment to your FIL, you are an angel!

I just wanted to add to my sister in laws request above. My mom is also in a nursing home - for over 10 years. Dad goes to see her every day but he can't handle his finances or bathe daily like he used to. I live in FL and my sister is handling most of it in PA. When I go up my dad will not listen to my sister nor will he make his dr. appt. He insists on going to the VA. I don't know what to do when they revoke his driver license. The biggest thing is mom but he can't concentrate and I fear for others on the road. This is such an unfair disease.