I don't really play CKII, but it seems to me that they should scale the effects of the bloodline based on a character variable that gets incremented every generation (with gender and legitimacy affecting how quickly it gets "diluted"). So for example any child gets their parent's value but incremented by a minimum of 1, being illegitimate by an additional 1, a girl by an additional 1, matrilineal by an additional 1, etc, and then this value is divided by another number to get the percentage of the effect lost. If they wanted to get really fancy, they could have this constant that the variables are divided by be itself a variable that increases or decreases depending on how many living members of the bloodline there are, so if the world is swarming with them it matters less as well. Modifying this number somehow by the sum of the living bloodline characters' prestige would also make a lot of sense.
It also seems to have a sort of pokemon gotta catch 'em all vibe to it, which I think will result in some amusing AARs.
Edit: Oh, and stuff like incest could "concentrate" it, actually reducing the "dilution" (although I don't think CKII players need more reason to be incestuous).
Edit2: Oh, and having dilution would also make the whole system more flexible, since you could more easily justify letting characters fabricate a weak or fully diluted claim to a bloodline (for the purposes of an event, war, conquest, whatever) without it actually giving a bunch of OP heritable bonuses, and you could likewise make the undiluted bonuses more powerful and interesting.
Sorry, lots of edits.