I have mixed thoughts on it. Clearly, the skit was poking fun at the NY Times, not the Palins. The premise was that the Times, and other media, will say anything to go after the Palins, without the facts. It's pretty funny purely as a send up of the Times.
On the other hand, joking about Todd Palin having sex with his daughter is really not very funny. Imagine how you'd feel if you were the daughter. Remember when SNL made fun of Chelsea? Everyone rightly said to back off. I think SNL could have made the same point in a way that didn't involve the Palin kids - especially a skit that involved having sex with their father. Kids should be off limits.
You have to wonder why good people go into politics sometimes. Is it really worth the cost in a culture as coarse as ours?