Look at the ELFA system from The Container Store to get some ideas. I used them in all my closets and pantry.

Why does the wall step back?

Unless you plan to store out-of-season stuff in your attic, you'll probably have a lot of out-of-season stuff. Even if you aren't storing parkas and mittens in the summer and shorts and bathing suits in the winter, you might end up with a lot of equipment --- the hockey stick in the winter, the lacrosse stick in the summer. If the closet is big and your tot doesn't need all the space, you can put holiday stuff in the niche until he needs it.

I find closet systems the easiest to change around. When your tot is 5, you'll want him to get dressed by himself -- and reach all his clothes. When he's 15, his shirt will need to be hung much higher.

You can't fill the 18" space and get rid of the best hiding space ever. It would be where I'd retreat to when I'm in trouble!

I need to see how this space relates to the bedroom. Kids love hidey spots so I need to see this room

It might be possible to get a pullout try type storage there for off season stuff too