"Free" upgrade = UDU, EUA, operational upgrade, etc. No instrument required.
"Supported" upgrade = CR-1, SWU, miles, miles+cash, etc. You are using some sort of 'currency' to support/pay for the upgrade.

As far as UDU priority, yes, it is the common belief here that UA status trumps the equivelant CO status for upgrade waitlist queues.

Again, it depends on your routing and equipment, but E+ cabins can be very full, so expecting an empty middle seat may not be someting you can count on. Plus, under UA's operating rules as I understand them, you may be asked to pay the upfare to place the "extra" family member into E+. All other stories contra to this should be considered exceptions and not the norm.