C.C.
My wonderful Aunt died this past February - she had fought breast cancer for 4 years. The kids adored her. I know when they got home from school they could tell something was wrong (I'd been crying all day). I sat them down and I said, "You both know that Aunt Reba has been very sick for a long time, right? Well, today she died. Her body gave up, even though I know she didn't want to give up. I'm very sad about it because I'll miss her so much. I know you will miss her too." And then I asked them if they had any questions. Mostly we talked about how it's not fair that someone so great had to die before she was ready to die, and before we were ready for her to die. The kids seemed to get over it much faster than the rest of us.
I should add that we are not religious (at all) and so the idea of heaven didn't come up, but if you are religious, it would be comforting for them to think of their grandpa waiting for them in heaven (or whatever your personal beliefs are).