The low temperature setting of a hot water heater will encourage bacterial growth. Santizing the water heater is the first step.
The link above is actually not too bad. You can also do the heat sanitization method but use extreme caution when doing this. Do not allow the kids or the elderly access to the water during the time of heat sanitization. Turn the water heater to its maximum setting for an hour. The burner should turn itself off after a short amount of time after it has reached its maximum temperature. The water can cause extreme burns almost instantly at these high temperatures. Let it set for an hour, run the hot water through the lines of the house, and set the temperature back down to its proper setting.
This will usually take care of the problem.