I was thinking of Tracey's blog about IDSR - I did something right - about the things we do great as parents. This is what I think is my strong point with my children. I am honest with them. If they ask a question and I answer truthfully. For example, if I don't know I may say, "Sorry I am not sure we should find out together"  Or if they ask an awkward question I will answer as simply as i can. It also opens up opportunity for communication as I  learn to talk with them. I don't appreciate being lied to so I don't lie to them.
This is a personal decision. I like my children to have an imagination but I wont tell them to be good for Santa for example. My daughter for example who turned 7 on Saturday is a huge fan of cartoons and fantasy television. She also loves magic tricks. She is amazed by the illusion of magic tricks yet she knows there has to a secret to them. A few weeks back she was doing the disappearing leg trick! She then showed me how it is done. She is like me - doesn't  want to leave people thinking its real.