Brandon,
Many of your questions really center around cost. If you are fortunate enough to have plenty of money to spend with no worries, then I think that the Fast Track, Lion Chief Plus, or Plus 2.0, and remote control is definitely the way to go for you.
If you are on a budget though, and want trouble free performance, then you have to decide whether you want to stay with Fast Track (which I consider to be really really expensive), or go back to traditional Lionel Tubular track, which I like because it is easy to cut and make custom pieces and doesn't seem to me to have some of the electrical quirks of Fast Track.
The older PostWar engines are the old gold standard, but they are generally rough runners and don't have much of the bells and whistles extras you are looking for. Also, you have to be the kind of person who enjoys opening them up, lubing them, replacing brushes, etc. (Personally, I don't.)
My recommendation though, after having just jumped back in last year after a 40 years absence, is to always go with a modern locomotive that has TWO can motors in it, and is year 2000 or later. And, unless you are going the Lionel Lion Chief engine route, always get a Williams locomotive, or better yet a Bachman locomotive, to start out. Having gone through many new locos in the past year, I have found that out of the box, these are the most trouble free and best looking.
Also, I would highly recommend that if you kids are going to take part in a hands-on fashion, then go with short diesel locomotives until they get older. Why? Because the steam locomotives have lots of wheels and small trucks on them, with as many as 12 wheels, and these I found tend to derail easily and are much harder to "place" on the tracks. The diesels generally have two sets of trucks, four wheels each, spaced apart, and are much easier to place. Many of the small ones only have four wheels, and you can plop them right down on the rails.
By way of example, check out the Williams 44-ton Scale locos, at Trainworld, for just $149.
After you get everything set up, and you and your kids have mastered most of the basics, then there is plenty of time to go with big steam locomotives, and I think you will appreciate them more.
And, by the way, there are three major classifications of O gauge cars/locos. They are tin type, scale and traditional.
Tin type are literally made of tin type metal, with lithograph.
Scale means the dimensions of the cars and locos are all accurate 1/48 scale to the real world trains (1 inch for every 48 inches). These look great, but are much longer units.
Traditional basically means toy type, which looks like what you have in your current set. They are shorter, taller, and much more kid friendly. These can be run on tighter turns, and are generally cheaper than scale. They are generally more robust, meaning that they don't have tiny rails and accessories that will easily snap off if you pick them up the wrong way.
I highly recommend starting with the Traditional. There are tons of these out there, new and used, and you won't have a heart attack if you kids drop or step on one. You can get really nice looking ones for medium prices, or really basic cheap ones at low prices, depending on your tastes.
Sorry for the rambling. Just my opinions.
Mannyrock