A friend gave me Kingdom http://www.lamemage.com/kingdom/ a few years ago, and I thought it was quite good for just this purpose. He used it for his kids; I’m planning on using it for mine and to generate stories for them.
I like that it is a roleplaying system in which mind modelling takes a high priority. It is story-driven, communication oriented, and based upon having a community. I really like it. Here are some examples of play. There are no dice.