Another one in the tell the truth camp here.

For me, birth and death are a fundamental part of life. I am completely open with my three year old about pregnancy and birth - she knows all about how mummy helps ladies have their babies, she has watched beautiful, calm natural births on tv with me and I explain it all to her and she views it as completely normal.

I treat the topic of death in the same way - I feel it's important she understands it's part of the natural order of things that people and animals are born, and they die.
Recently my mother lost her dog unexpectedly that she has had for 12 years - DD has known and loved him all her life. She asked where Sam was and I explained to her that he got sick and he had died. That he wouldn't be at Ma's when she went there anymore because he had come to the end of his life with us.
She was remarkably accepting of it, she did look for him for the first day we were there but I kept gently explaining this to her.
I totally understand the intention is kind and good to shield little ones from death but I do often think it's because of our own fear of it's finality and the unknown that we tend to want to handle it this way. Being open with her about it forces me to think about it as well, and talk about it.