What a bunch of nosey busybodies in town!
I have a few ideas. Since the cat is out of the bag now, why not all of you go out socially a few times so people can see that you guys are all happy with the situation? Or go out alone with M as friends and let everyone in town wonder all over again (I love messing with people who stick their noses in where they don't belong).
You said, "I know she wants to get married and have kids someday and I feel like I am blocking her happiness by being married to him first." How long has your hubs H been seeing M? Are you and he opposed to him fathering children with her, if that is what she wants? Do you know what she wants? Maybe she doesn't see herself as a wife and mother, or maybe she's fine with it being a bit more distant in the future. And if she does, why couldn't she have a primary and still see H as a secondary? No need to feel like you're preventing the relationship from developing, as it can take many more forms in poly than it could conventionally! Signing a paper saying you're not married wouldn't do anything -- you'd still be married. But I think you are panicking too much.