Implementation-wise, it would be fairly simple, we could have a few item types like “diary”, “letter”, etc that you either 'a’ctivate to read or have some kind of override for the description code so it displays the text when the item is examined in the inventory. These could then be hooked up to data files that have chunks of prose, so that any time one of these is spawned you get a random chunk of text attached to it. Then we’d probably throw it out to the community to write the prose that would be included in the game.
The player having a family would be much more complicated, not least of which from the fact that NPCs in general would have to work right first >_<