How should I deal with two siblings in the same section? How can I deal with two family members who are playing in the same section?  For example, my brother and I both played in the same local tournament (one section) fairly frequently.  Usually, we could avoid being paired (there were enough people, and the other players were willing to cut us some slack).

Occasionally, we would be leading the tournament and there was no way around pairing us.  The most drastic case was when we both had perfect scores and were playing for first place (and potentially third for the loser).  As a good big brother, I soundly trounced my younger brother.

Now it's not far-fetched to imagine a case where the game between family members impacted prizes/tournament standings at the end of a cash tournament.  Is there a fair way to deal with the situation?  Obviously any kind of collusion would be grounds for a double forfeit, but it would also be very hard to prove that it was a pre-arranged result.

An interesting side note - I seem to remember seeing that former World Champion Kosteniuk used to play in tournaments with her sister, and she said that they would be paired in round one to avoid any conflicts later.  Is this a reasonable solution or is there a more equitable way to deal with things?
The situation is not very different to two training partners or two friends being paired. The dilemma between sportsmanship and friendship is the same. Are you allowed to "misuse" personal information about weaknesses of your opponent? Should you pre-arrange a result to fit the needs of each other?

The keyword is sportsmanship here. You are playing in a chess tournament because you like the thrill of a tournament, the competition and over everything else: the game. You both share this love. Why should you sacrifice the idea of the sport at all? Trying to win against an opponent is not a personal affair, but a trial of strength between the two players. That is why you joined the tournament in the first place! If someone beats me, he might still be my best friend (at least, after my embarrassment of having lost is gone). If you pre-arrange a game, you harm the idea of the tournament and you harm yourself, because you get less excitement and benefits from playing there.

There are several cases of successful siblings competing in the same sport at the highest level. In Formula 1, the Schumacher siblings Ralf and Michael were competing for several years at the same races. In woman chess, the Kosintseva siblings Tatiana and Nadezhda are both ranked among the 20 strongest women. I think they attend the same tournament together very often. I doubt any of them would sacrifice the sport, nor did I ever hear someone voicing that opinion.

Hence I would suggest, the more professional the level of play is, the less you have to worry about siblings being paired against each other. As a tournament director my fear about cheating players would not increase only because there are siblings playing.