Wow.
I'm all for bathroom privacy. However, we did just fine on a houseboat for 5 days with 7 people.
What do they want? A bathroom per fanny? That could get expensive.
We've stayed in uppity hotel suites and we've peed behind trees in the woods while camping. I'm not really sure what their thing is, but if they want everyone to have their own bathroom and it doesn't matter to you, go with it.
That way all your toiletries and towels, etc can be in your own bathroom and they can do whatever it is they need to do in their own.
Sounds kind of trippy to me, but if you have the option and it's no more expense, let them have what they want. Are the kids afraid of people walking in on them or what? Are they afraid their kids will walk in on someone?
Maybe it's not even the kids.
Maybe your sister and/or her husband have serious stinky gas issues and don't want anyone to know.
The kids are just a cover.
:)
I think it's weird, personally, but not worth ruining a vacation over.
I hope you have a great time!