I have always tried to be honest with my kids about death....I remember my Dad answering my DD's question about how Nanny got to heaven in a off the cuff way, 'on an escalator' after that she was terrified every time we went to the shopping centre and even now doesn't really feel comfortable on them. My DD8, was almost 1 when my Dad passed away, so she never really knew him but she knows all about him and has seen his ghost a few times, and it hasn't freaked her out! She still asks questions occasionally, but these days she makes up her own mind about things. Lightning is my Dad taking photos of her, because he misses her and cant believe how fast she is growing...all her own thoughts!
She is the one that insists on visiting the cemetery on special days, she says that its a sign of respect and shows them how much you love them!
I think kids need small amounts of information and they will process it in their own time and come back and ask questions later, usually when you are least prepared for it, but be honest and don't gloss over things!
DD8 went to her first full on funeral this year, and was amazed at how many people were upset, she was just so matter of fact about everything, how this man was so much happier and that he was not sick anymore and he was with his best friend and very happy! It was just crazy, but sweet at the same time, she even explained it to the widow as well, thankfully we know her very well and she just adored what DD said and it gave her a lot of comfort.