I think I'd ask your granddaughter (the laptop donor) to recover/reset her password for her sister. The reason being that she already has half the key - e.g. her email address, ID or mobile phone for 2 factor authentication if needed. However, once the password is reset, she will have to ensure that any account credentials that the laptop holds for emails, Facebook etc are removed so her (receiving) sister can add/open her own accounts in her own name and also change the shared new password. However, it may still be the easier option.
A full factory reset could be straightforward (I've carried one out on my old Windows 10) but it would help if your granddaughter can check the version that is running on the laptop before following instructions for that version. (If your (recipient) granddaughter messes up the factory reset, she can carry out another reset - she has no data to lose anyway.)
If the laptop is older and running Windows 10, be aware that it will be out of support within the next month. It will still work but its security will degrade over time and there will be no updates.
If the laptop is running on Windows 10, your granddaughter should check if it meets the specifications for upgrading to Windows 11 and follow the instructions to install it. If it is already running on Windows 11, it will be supported by Microsoft and be suitable for use for some time.