I think being a parent is the hardest job you will ever have. It certainly is the hardest one that I have held - and I've worn many, many hats. But it is by far the most rewarding one, and I can't imagine my life any other way.
And when I say hardest, I suppose I really mean challenging. I have been blessed with a really smart four year old daughter who asks tough questions. So, based on the few years of experience I have had trying to answer her as she ponders the mysteries of life, I'll share some ideas with you now.
-- Only give answers you are comfortable giving. Saying something like "G-d made each of us a little different" or "G-d wanted us to be part of the same family" are both good answers to certain questions - but only use those lines if it's something you want to be teaching your child.
-- Use specific terms. By an early age, your child should know what his/ her religion is, and perhaps some names of other religions (just as he/ she knows their gender, adoption status, and perhaps race).
-- Come up with answers to questions before they happen. Don't wait for your kid to come home asking for a Christmas tree before you figure out what you are going to answer. The nice lady in the supermarket will ask your child if Santa brought him/ her a nice present for Christmas. It is up to you to decide what to answer, if to answer, and what to tell your child to say.
-- Be prepared to explain levels of observance in a simple and respectful way. As we walk to synagogue, my daughter asks if the people driving by in cars are Jewish. I explain that they might be, but they might not. She knows that some Jews drive on Shabbat, some don't. Though she doesn't need to get into the terms Orthodox and Reform at this age, she can know that we are all a little different in our observances.