Do you need to have one middle name from each side if you have two children?

No.

The sad situation with your sister changes everything. No-one would begrudge you choosing her name as the middle name (if you eventually have a dd). Your DH doesn't have a brother or similarly young/close relative who died so young and so there is no "equivalent" - for each he and his family are surely grateful.
Presently you have one son. Name him as you wish. If you were "only" naming after grandparents etc then I would say usually it would be best to pick one from each side, but the fact that you may have a daughter in the future and the sad and unusual situation with your sister passing, totally changes everything.

You don't have to use any middle name. I don't have one!

Just choose a name you like because you and the child are the only one who will use it.

My kids have two middle names (as do I and as did my husband). My son has both his grandfather's names for middle, my daughter has my mother's snd his grandmother's.
I think it's a nice gesture, though my middle names are random.
Are families really that invested in what you call your kids though? Unless there's a traditional middle name just go with what you want.

My kids have names from my side and not from his.

In my opinion no. I named mine after relatives dh or I had loved/love and missed. Not to set a score of evenness. As it is we are 3/2 in dhs family favour as dd1 has a name that works in both families. However my mothers side has not been used at all. Has never been a issue. With ds we always knew he would be named after late bil it fitted nicely with his name too.

Call your children what you like. Our two both had middle names from my side of the family. Our first GD was given a first name in honour of her mother’s grand mother but her middle name came from our side as did her younger sister’s. Both her brother’s names came from our side too. This was all in part because of the names the in-laws tried to inflict on them. The in-laws are probably more upset that they all look like my father’s family. That said, they are all quite nice looking!

Ds has my grandads middle name
Dd1 has random
Dd2 has random
Dd3 has my husbands mothers name.

We gave DS1 DH's middle name, which is also his grandad's, MIL's father's first name and MIL was still offended because it's my Dad's name too

I always felt that the best solution to this dilemma is avoiding names already used by other members of the extended family.

1. It's your child, do what you want.

1. Do his family know your Grandpa's middle name?! Surely not. If it's going to be a problem just say you love the name and don't mention Grandpa to his side of the family.

My in-laws put a lot of pressure on about my son being called the same first and second name and also surname as my husband! They even showed me their full family tree to emphasise the number of boys in their family with the same name. It made me feel upset and separate as if I was producing a child for another group of people to name. My DH briefly attempted to join in with them but we had a really big chat and then sorted out what we really wanted and then we just chose names that we liked and thought were beautiful.
His mother kept mispronouncing my sons name for quite a few weeks after he was born I think to make a deliberate point but I just waited that out with a rictus smile.

I really think choose names you like, I have never like naming after somebody even for a middle name, it’s a weird legacy that means everything to the parents and almost nothing for the child,
I also dislike it when the child asked and then you have to say they were given that name because someone else died especially if it was early or tragic it has always struck me a abit of a strange burden for a child.
My children have their own names no ‘family’ names. I think the family surname is enough.
That being said so sorry about your sister.

My kids both have middle names from my family, that was the deal when I agreed they would have dp's surname.

no

you don't have to do anything, there are no rules or requirements regarding what names you pick.

we picked FILs name as DS1's middle name because I liked the name and it went well with first name.

had 5 more boys but never pick my dad's name, his first name sounds weird in English (it's Hungarian with no English version) and I dislike his middle name.

DH & I decided on all of their names, never occurred to us to get anyone involved.

your kid, your & partner's choice

If it's DH's surname then it's your choice on middle names.
My DC are
#1 - my side, his side, my side, his surname
#2 random name, both sides, my side, his surname

Our children have middle names from my side. My family like it, MIL couldn’t care less.
If she had been bothered I’d have pointed out they share her surname so it’s perfectly fair.

Depends on the family. I don't think my PIL will care

Ds1 has his grandfather’s name as a middle so does DS2 (different dads!). Deal both times was I picked first name & their dads picked the middle names they wanted.
DD doesn’t have any family names- she was going to have Alice as her middle name after my great grandmother but we changed it to Violet on a whim as she was bright purple when she was born 🤣 Pg with number 4 at the moment & middle name will probably be something from my family to balance things out but we’re lucky we’ve got lots of kids so can pick lots of names 🤣

I don’t think middle names matter too much as long as they go with the first name you love & don’t spell anything ridiculous 😬

We intentionally chose one from each side. It just felt more balanced.
In fairness I don’t like either name personally but my DC love the connection.