When I'm doing controls it's as simple as that : https://dl.dropboxusercontent.com/u/495 ... trols.capx
I also added a character select so you'd see how I would start with the basics of picking a character.
You don't use families for this but I've added the two events underneath to show how you could use families, i.e. when any character's health is 0 then destroy, this saves you from typing out when wizards health is 0 then destroy, when knights health is 0 then destroy.
The setup of the controls is really based around how your game works. If player 1 selects wizard, the wizard will spawn OK but which controls are they using, is it always the same set of controls for player 1 and player 2? It's easy to set up with player IDs.
Regarding the last question, that's for you to decide I guess? You said it was local co-op so I guess the controls are set to certain buttons.