Lyric discussion by Portisslave 

Cover art for Candy Coated Dream lyrics by Neutral Milk Hotel

I thought the meaning of this was pretty straight forward in that he's had a daughter with a woman whom he loves but she no longer loves him, and wants to seperate, so his dreams of a family ar dashed, and he fears for his daughter's stability because of this void "And her life will fall between The cracks that follow you and me "

And as he says, hanging up the portrait of the family smile is just him romancing, chancing, a candy coated dream.