M.P.
This is pretty much normal behavior for boys this age. It may be more intense because of both boy's insecurities.
I don't have much time to write so I'll just make a couple of brief suggestions. Separate them before they get on each other's nerves and act out. Do they each have their own toys as well as shared toys. If not I think that might help. EAch boy is in charge of his toys and can refuse to let the other one have them. They will learn how to share with the toys that belong to both.
I adopted my foster child. The family dynamics are different when one child is a foster child. I could write for hours on that subject. I recommend that you do more reading about fostering and how to help your own son and the foster son feel more secure and loved. Keep in mind that the foster child may not have experienced love. He may also have had to fight for whatever he got. Food, love, toys. And your son is likely to feel displaced by the foster child. The dynamics are similar to having a baby born into the family but yet different. Because he foster child is older your son is at a disadvantage is some ways. He may feel powerless. I can almost gaurentee that the foster child feels powerless. Find a way for both of them to both feel and have some power. Separate toys is one way.
You have taken on a challenging and much rewarding job. I praise you for it. And you are thinking along the right lines. Stick with the marshmallows for awhile and see if it doesn't help. Time outs don't work with all kids. I suspect that the foster boy feels rejected when he's given a time out. I couldn't use them with my daughter. And both she and I have found that they don't work with her children. What does work is to send them to separate rooms to cool off. They can play, watch TV, listen to music, whatever they want as long as they stay in their rooms. They decide when they're ready to come out and be good company to with each other and with the rest of us. The younger child was 3 when she started this.
Depending which agency you're fostering with you can ask for some help. I fostered thru CSD and insisted on counseling for both my foster child and myself. I also attended several really helpful workshops and a support group.
If the 4 year old has not been with you for very long, sharing may not work. First he has to feel wanted and that he belongs with you. Again, having separate toys will help. Thrift stores are a great place to get toys inexpensively. I took my daughter and now my grandchildren with me so that they could pick out what they wanted. You can tell them ahead of time how much they can spend, otherwise they may want the whole store. :)
This will work out. Your son is safe. Hitting is common at this age. As long as they are supervised by an adult they won't seriously hurt each other.