Yes I have... It wasn't in any d20 game.
It was Mekton by RTalsorian. The great and epic battle as we fought our way into space ended unsatisfactorily. We escaped the blockade of Algol (our home world) but failed to win the space battle. So the GM let us write a short story about our character's life after the end of the campaign. Then later much to our surprise, he ran a game where each of our characters was a direct descendent of our previous character. He drew heavily on the stories we wrote to make a unique family legacy for each of us. The campaign became as much about us realizing and either achieving or rejecting the plans laid into place by generations of our bloodlines, as it was about defeating the dangerous alien invaders threatening the galaxy.
Quite fun largely because we didn't know most of this going into the game. As the scenarios played out we got hints and pushy parents at first. But by the end of the game we were brought face to face with the plans laid in store for us based on some distant ancestor. We lost the fight against the alien invaders. But only because we stopped being much of a team and focused too much on our story lines. In the end one of the PCs used time travel to turn traitor and save the bad guys.
We highly suspect that if the GM ever decides to run Mekton again we will once again be playing descendents of these characters. The GM has even talked about using the traitorous time traveler as the actual main bad guy.
I didn't, but I did. :)
Some 20 years ago (?) I joined a 2nd edition campaign where all my fellow adventurers were the offspring of their former high level characters.
And the campaign lead us back to some archdevil who was the BBEG in the previous campaign.
It was really good, with lots of hooks and the advantage of having an existing world.
We started in level 1, and when we ended that campaign my bard was something like level 30 (in 2e the classes had different xp/level tables).
I've heard a story from one of my old group's players where the party started playing an Evil campaign, got to the end and one session before taking over the world... then showed up and the DM passed out new character sheets, saying "Now roll Good Guys to stop yourselves". They proceeded to play through a completely new campaign, get up to the same point, then dig out their Evil sheets and have the big final battle against themselves.
I've always wanted to do something like that, but never managed it myself.
My old group played a 3.5 game based in a medieval version of the DC Comics universe. We were relatively high level, though I forget just how high, and gestalt. We spent some time on Krypton before it exploded, under the effects of its red sun. One day our DM looked at everyone and went "Everyone make versions of your character that are 1st level, non-gestalt." Jaws dropped so hard you could hear them.
I've done it in L5R. We kept track of who had kids. Since I played a monk, I got to pick from everyone else's.
LOL that would really screw around with people if they didn't know that was going to happen.
I'd probably frame it in the context of a one-shot with the high level characters, then give the players a choice (probably via a deity): relive the lives of their PCs from the beginning and possibly change the path of history (thereby preventing the defeat) -- or start a completely different campaign.
I've seen people play the children or relatives of their other, retired PCs, sure. I haven't always seen the idea of avenging the wrongs of a failed parent but I'm sure it's happened... although one of my characters in a PBP has that as a concept (but I never actually played the parent, so it doesn't count).
I haven't had much of an opportunity to myself, although in an old WOD campaign, I did imagine out what one of my PC's daughters would be like and statted her up.
Even if the players hadn't played the failed adventurers, it makes for a great story hook as to why the party has gone together -- "let's fix what our parents broke" makes for a good group motivation. :)
I actually toyed around with a similar idea - the campaign would take place in different historical eras, staring in the stone age, moving to the bronze age, the iron age, high middle ages, and ending in a late renaissance/lite steampunk era. PCs would play up to a predetermined level (say 8-9) in each era, and then "retire" the PCs. I would adjust the campaign setting based upon the PCs actions (did they defeat an enemy tribe in a stone-age battle? They vanish from history, having gone extinct. Did they install an ally as Duke of an influential fief? His descendants become powerful kings) and the PCs would play as descendants of their earlier characters (with special traits/feats based upon previous classes/accomplishments - descendants of warriors would get special weapon proficiencies or more HP or something, descendents of mages would get spell-like abilities, etc). I was even going to tailor the availability of classes to the particular era (e.g. no wizards in the stone age, but sorcerers are okay).
I'd like to try it out someday, but I'll have to let my players get a little more receptive to the idea before I put that much effort into it.