Take photos of their creations. And get yourself a digital frame. Have a frame for each child and they can show off their pics (you can store lots of pics).
With the toys we tend to do a cull right before Christmas for those less fortunate than ourselves. They feel happy to do this. I have never ever sneakily thrown anything out be it junk, toys or artwork. I think it builds a lack of trust.
With artwork we keep a few to display (their choice, sometimes I might choose something I particularly like too) which we do on strings with pegs along our walls (cheap, can store lots, on any wall and be changed easily). We also take photos of everything and then the rest gets stored in a big tub for use in wrapping, cards or other projects (to cut and stick, to make into strips for weaving etc). We do artwork almost everyday and rarely have to consider throwing out anything unless it gets water shredded from accidently being left out in the rain, we always seem to be able to make use of things which DD1 seems to love repurposing (DD2 is not old enough to really get it just yet but we still talk to her about it) but when we do have things to recycle we just talk about why, if that causes issues then I know that piece isn't the right one to get rid of. With big structures, I let my kids self destroy those through play (box buses, castles and such), it usually only takes a couple of weeks at this age at most. After I cut down anything reusable for my cardboard scraps box and the rest is recycled without resistance from my kids. To cut down on an influx of drawings we got some chalkboards and chalk so they can create, photo then recreate to their hearts desires without a huge paper waste. My kids have always preferred paint to pencils though so it was always less of an issue, if we ever get a large overflow Id be looking at making our own paper since I think the process of it would be interesting to DD1 but if we didn't have time then just more explaining and gauging their reaction for whether they are comfortable letting go of something or not.
With toys, we do as others have mentioned and talk about sharing what we have been lucky to enjoy with others. We have lots of generous grandparents so it is something we seem to have to do about bi-yearly. We have tried to encourage less buying for the girls but they just love doing so so now we just encourage it to be more natural open ended things rather than loud, flashy plastic and they seem to have got on board which means less stuff I'm keen to ditch as soon as it's gotten. In the meantime we have a toy rotation system my kids get involved in where we keep out a few things and put away others to later be swapped as I find less is more for them (although some things stay out consistantly; blocks, Lego, trains type things). When something keeps being chosen to put away is when we talk about passing it on to someone else (unless it is something DD1 has outgrown that DD2 will grow into type thing).
With their things, art or toy or otherwise, they are theirs to me so I always just give my options and leave it to them. I find they always have a couple they are particularly proud of and then heaps with less of an attachment to so it always naturally works out.
With artwork we get them to chose a piece to use as wrapping paper when giving gifts. They can then wrap a gift in their own creation. We also have a roating wall of art displays so it will go up for a while, then when it gets taken down it is photographed and the art can be used as wrapping etc.
We also do the pre-Christmas clean out and donation thing. Recently we also had a garage sale as DD1 wants a snow holiday this year and it's expensive so she started earning some money towards it by holding a garage sale.
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