1. Do you anticipate ever wanting any of the property?
A. Yes, and parents won't need money in future: then the family needs to get together to discuss upfront and with everyone in attendance how the best way to divide the property up. Maybe have the prime piece put into an FLP, with you and sister equal owners, and the remaining property split equally and then deeded in each of your names. I'm sure you can have some kind of agreement written up that the parents have right to live there as long as they want. Unless your parents have a lot of assets, there shouldn't be any significant tax implications, as this sounds as if it would fall under the lifetime exemption.
B. Yes, and parents may need money in future: again, get together to determine how to break up the land eventually, but put the entire property in FLP. If parents need money, then they can sell what they need, if and when they need it. You and/or your sister could have right of first refusal to purchase land prior to selling it.
C. No: let the sister and BIL figure out what they want, get an appraisal of the property AND of that carved out piece, with value of remaining property. If they pick the prime spot, then the remaining property may decline in value. You will also want to make sure that the remaining property has access for whomever purchases it eventually. Then, come up with an equitable price and have the sister and her husband put that money in a trust, along with the differential of the remaining property's value, so that, upon the settlement of the estate, if any money is remaining, after your parents use it as needed, it is split evenly between you both. The trust can be set up so that there is an independent trustee that manages the money, and can release funds for mom and dad as needed, and you aren't part of it. Hopefully mom and dad won't use that money to support sis and BIL. Also, don't let mom and dad owner finance any of it, as there will be a good chance that sis and BIL won't pay, and your folks won't take them to court.
My guess is, they don't want to pay any money up front. They want the land given to them and then use the equity in their current home to build their new home so they don't have a large mortgage.
I'm not a lawyer, but this seems the most upfront way of doing everything, protecting your parents, as well as both yours and your sister's interests.
