Writing the code to make the game generate relationships appropriately (and to allow the player to assign relationships to custom Chosen) was surprisingly tricky, but I'm bugtesting it now and it all seems to be working properly.  As you'd expect, making two Chosen into siblings will properly also make them siblings to each other's siblings.  A big sibling's big sibling will always be a big sibling, a big sibling's little sibling could be either a big sibling or a little sibling, and groups of twins (or triplets, quadruplets, and so on) will share all their family relationships.

When you set one of your Forsaken as bait, the loved one that shows up as a result will usually be a sibling, but the more siblings one of the Forsaken has in play, the more likely it is that any extra loved ones who show up will just be childhood friends instead of siblings.  Characters aren't regarded as being directly related to their childhood friends' siblings, so the net of interlocking relations shouldn't get so dense that the player is unable to sacrifice any of their Forsaken without angering all the rest.  (Not to mention that it would get pretty ridiculous if bait Forsaken in long-running campaigns always ended up with many many siblings.)

I'm currently deciding how the toggles should work with custom Chosen.  I know that a lot of players like to use custom Chosen to recreate characters from other media, and it might feel strange for those characters to have a bunch of randomly-generated siblings show up.  But at the same time, players can avoid that by just not setting the custom Chosen to the bait position in the first place.  I'm still thinking about how to handle it.

As a final note, all of these mechanics will work exactly the same when family relationships between Chosen are toggled off.  They'll be generated in mutual groups of friends instead, so the gameplay functionality won't change.