I am obviously a big fan of historical fiction (two of my novels are based in the Middle Ages) and I tell my students writing their family stories that there are advantages to crossing the line into fiction – either fictive biographies or historical fiction.
First, fictional characters can be the personification of important forces in the story.
Status quo: You may not have any evidence that someone told your grandmother that a woman can’t open her own blacksmith shop but since the establishment of the status quo is essential to showing the adventurous nature of your grandmother, you need to introduce this idea. However, these ideas must be personified within a character, they can’t just be a vague social pressure that is described.
Antagonist: Perhaps most importantly, a fictional character can be the antagonist who personifies the deprivations of the plains or the threat of World War II. Again, your story is more compelling when your grandfather is up against an actual sheriff or corrupt immigration officer, chased by a character who is a Nazi sympathizer, than if his challenges are just described.
Outside perspective: if you don’t have diaries or letters from your ancestors that you can use as dialogue, it is very handy to create a fictional character who stands next to the main character and provides their outside perspective looking in or who reports on events for which you do not have factual material. This is a great technique in historical fiction as well – creating a character who stands next to the famous character, Shakespeare’s butler or Eleanor Roosevelt’s driver, for example.
Theme: I think the main difference between writing a factual family story or a fictive biography/historical fiction is the necessity within fiction to find a theme-- a "statement on humanity" -- that is at the core of every piece of art. This theme weaves throughout the entire narrative and characters personify the multiple facets of this theme. The writer’s job is to explore as many facets of the theme as she can to deliver a higher truth then fact can provide. A Slender Tether looks at ambition and its flipside, disillusionment, as all the characters have their own agenda regarding ambition and social status.
But what theme describes your family? You would not include this in a straight-up narrative, as not all people within the family demonstrate the same theme, but once you move into creative nonfiction and beyond you may choose to highlight all the courageous pioneers, all the inventors or all the refugees within your family.
Any family story is set within a time and place in history and so regardless of what genre you choose, historical research and verisimilitude is important. In fictive biographies and historical fiction, the internal theme must be mirrored by external forces. For example, the frivolity of the court of Charles the Sixth during the time of Christine de Pizan is mirrored by the insistence that she spend her life as a frivolous woman.
Here are more suggestions re: writing your family story:
#1: How and Why You Should Write the Story of Your Family and When to Veer into Fiction
#3: "Good Storytelling Techniques for Family Stories"