Are you on a Mac? It's a whole lot easier if you are.
On PC, I guess you could just turn off Auto-Syncing of playlists and have it only update certain playlists when you plug in her iPod (and yours). So have a playlist called 'Sister' and have all her songs in there, so when she plugs in her iPod it'll only update songs that are in that playlist.
It will end up adding songs that she downloads/rips etc. tho to your library too, so they'll end up on your iPod unless you too do the manually update (or update only certain playlists) option.
We have three iPods in my house now, and it's such a breeze with OS X Panther (just make three user accounts, all with their own iTunes Libraries).