Is it legal for breeder to keep the deposit?

I'm very sorry for your situation, but as a general rule contractual performance isn't excused becauew one party to it dies, and certainly not because that party's spouse dies.   Generally, if you enter into a contract and die before you perform it (in this case, pay), your estate is liable on the contract.  Without getting too technical, there are situations where a court could find that complete forfeiture of the deposit is unenforceable, but the purchaser would still be liable for the actual damages the seller sustained by reason of the breach of contract.  In this case, this would likely be the difference between the price you contracted to pay and the price the seller was able to seel the puppy for to someone else.