Characters actually return during the prep phase:
Set Aside a Character
You may set aside a character with a set-aside enhancement or return a character from a set-aside area to your territory. You may only return characters from your set-aside area during your Preparation Phase.
This should obviously be modified to say: "You may only return characters from your set-aside area during your Preparation Phase (except for a special ability on a card)." But the difference, although somewhat subtle between coming back during your upkeep phase and prep phase, can be important.
For instance, you may want to set aside all of your characters with The Sabbath, but you have a guy set aside (maybe with Provisions) ready to come back. You can set everyone else aside, then bring the Provisioned Hero back and attack with him, since you can bring the characters back at any time during your prep phase. Most people bring them back right away, so it is a reasonable assumption (and one that I made for a long time myself) to think they come back during upkeep. The only things that can happen during upkeep phase are counters being added and triggered effects (like Set Fire) activating.