You didn't go into the situation re: the boy's father but I want to remind you that while they are living in your house, you will be the father figure.
I know you are still only 'Uncle Tinfoil'
, but as this youngster grows up he will get his idea of what a man should be from you.
You sound like an intelligent man who can understand the responsibility that this will entail. I think it is perfectly reasonable that you and your wife and sister sit down and work out the details of how this child will be raised, and that includes discipline.
Good Luck to all of you.