Although Nintendo said they wanted director Masahiro Sakurai to return to the series if a third Smash Brothers game were to be made after Melee, Sakurai apparently wasn't contacted when a third game was announced. Soon after a private meeting was held between Sakurai and the president of the Nintendo Company where Sakurai was formally asked to direct the next game.
According to Master Hand's in-game bio, he's a being of unknown origin who embodies the creative side of man (as opposed to his counterpart Crazy Hand, who embodies the destructive side). In the original Super Smash Bros. for the Nintendo 64, he's the gloved hand that pits Fox against Mario during the intro. This implies that he is the outside force that makes the characters fight each other in the game (it is worth noting that while selecting your character, you use a cursor that resembles a gloved hand).
Which characters are comfirmed to appear in the game?
Why do the characters turn into trophies when defeated?
It is explained in the game that within the Super Smash Bros. universe, all of the characters are trophies that come to life when summoned for battle. Once they're defeated, they turn back into trophies until they are revived again. This concept was first introduced in Super Smash Bros. Melee (for the Nintendo Gamecube) in which your character would turn into a trophy at the end of Classic and Adventure Mode. A similar concept was used in the first Super Smash Bros (N64) in which the characters were dolls instead of trophies.