Means of Reproduction

Aside from magical and sci-fi stories, straight couples are going to need to adopt or use a surrogate mother. With this in mind, I present a hypothetical:

A straight man and a mtf transsexual are a couple, but the mtf transsexual's sperm has been saved.
The mtf transsexual's sperm is used to artificially inseminate the straight man's sister.
Therefore, the child produced is legally the nephew/niece of the straight man.
The mtf transsexual is the biological father.
The sister is the biological mother but is legally the aunt of the child.
The child is raised oblivious by the straight man (father) and the mtf transsexual (mother) with the biological mother acting as an aunt.

Does this scenario cross ethical lines? Is it incestuous? If this were included in a story, would it be overly bizarre? Is the alternative of adoption,random egg donor, and random surrogate mother more appropriate? Is there value in keeping it all within the family? Should the kid ever find out?

I am currently working on a story that grapples with this issue.

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