Doing even regular request stories for people has twisted me up inside, even for complete fiction. I can't imagine later finding out that it led to such a horrible situation. Sadly(?), it's easy to imagine that the sister could have had different feelings than we assume, even though it would be impossible to not at least show great shock and disgust.
On second thought, that could make for a great meta-story where the sister finds his written fantasies and then acts it out with him, though never admitting that she found the stories. The real-life author would have to use names that absolutely don't exist! Also, could be actually be written as a comedy too? (Shadowknight? )
The creepiest thing I've ever heard was about a friend who does "more than risqué" cartoon fan-art (along with clean stuff too): he received e-mail from a father asking that he draw his young daughter in cartoon style, but nothing ecchi in the request. He wrote back that he wouldn't do it for the requestor's own good, since if anyone who saw it found out what else the artists draws then the father could get screwed. Of course, my friend was also worried that it could eventually bite him in the butt too. Potential disaster avoided.
I think you have the right attitude going forward, and I'm glad it isn't going to change what kinds of things you'll write about.