When DD asked about Santa Clause at like 4 or so ("now I want you to be honest with me mom...") I responded with a wink that the key point to keep in mind is that children who don't believe in Santa Clause do not receive gifts from Santa Clause. She smiled and we enjoyed a polite fiction about it for several more years. We handled the tooth fairy similarly. There was never a denouement because our belief was always a bit tongue in cheek.
I've always made the point that fantasy has a purpose, which is a tool for teaching us lessons about people and values and for stretching the imagination. I'm also with aquinas that faith and science should coexist happily in the mind and heart.
I think the biggest issue we had is that her understanding was more sophisticated at a younger age than her peers. This did cause some disconnect with them, but hey that was status quo back then.
