Fuck HIS life for having such an awful sister. You should accept what he wants to be, he shouldn't feel uncomfortable with his own gender/body just because you're afraid your children are going to be related to someone 'weird.' This, of course is assuming you mean your brother wants a sex change.
There's nothing wrong with what your brother wants to do, and unlike what #3 says, your children won't be fucked up because of it. No one will. If they're teased about this at school then have those children reported to the schools principle, because they clearly need a lesson in social skills.