I'll let the experts chime in about the engine. I'll give some dad advice, as a father of 4 kids, the last two twins I feel for you. The expenses only go up, but I wouldn't trade it for the world. Time with them is even more valuable than the almighty dollar, so enjoy it. Time goes by really, really fast. Every stage with twins (any child for that matter) has its ups and downs but 2.5 year old twins is an awesome busy age—enjoy it.
I have owned my MM since new, it is far from the car I would have picked but with 4 kids I had to make sacrifices and it was the best choice at the time. I appreciated it for what it was and now like it as much if not more as they get rarer and rarer. But that also meant it was a daily driver, eaten in, puked in, tantrums thrown in it, baseballs hitting it, etc. I have rebuilt everything on the car at least once. Now its looking like a paint job may be in order sooner than later. Since its been paid for for 15 years and doubled as a family/fun car it really has been a value and I can't complain. Good luck with your choice. Since you seem knowledgeable and mechanically inclined my gut would be to get a cheap replacement engine to get the car running while slowly rebuilding the engine of your choice. It limits the down time and provides you with managing the expense of the slippery slope of building an engine the way you want to.
Steven
2004 Marauder Black, loaded
Vortec S/C
4.10s
3500 PI Stall
Kook's headers
476.9 rwhp 385 lbs/tq
KVR's, QA1's, M&Z control arms, rear sway bar
Lidio tune
2004 Suburban Dark Charcoal
1970 W-30 442 convertible twilight Blue