My "big" question is, will the Arduino Wireless SD Shield create a network (hotspot) so the phone can connect to it?
Connect it to your wireless network by following a few simple instructions to start controlling your world through the internet.
Nowhere does it mention "create a network". So, no, it does not create a network. It connects to existing wireless routers only.
If it does not create a wireless network, will we then have to connect both the phone and WiFi shield to an existing network (like my router at home)?
Yes.
Last, if in fact it does not create a network, would it just be worth it to upgrade to the Netduino Plus and connect the controller box to the router via. Ethernet?
What makes you think you need to "upgrade" to the Netduino? The Arduino can wear an Ethernet shield.
The issue of whether to use Ethernet or WiFi is one of whether the Arduino with shield can be tethered via the ethernet cable, or not.