Hi L.,
I have a 5 year old and a 2 year old. I co-slept with both of my children and then we've done a variety of sleeping arrangements in the past 5.5 years. Our main goal as parents with the sleep thing has always been to ensure that our kids feel secure. Feeling safe is crucial to young children and establishes a firm foundation for independence. Children who do not establish safety and trust never feel secure and can become more clingy and stressed.
I am also a Parent Educator and Coach and I would recommend that you put a toddler bed next to your bed and allow your daughter to sleep in it until your younger daughter is about 18 months old. Once your younger daughter is 18 months, you can transition them both into a double bed of their own to sleep together. My children currently sleep together and they feel safe and cozy through the night in their own room. We have bunkbeds and we're actually going to be transitioning our 5 year old daughter into the top bunk - she has requested this. My two year old still wakes up about 5am and crawls into bed with us for the last couple of hours of sleep. I am okay with this - I know it won't last very long and I treasure the cuddle time. We also allow our children to quietly crawl into bed with us if they are ever scared. Our daughter sleeps with us in the middle of the night about once each week on average.
I was a fearful child at night and it was very comforting for me to know that my parents were available to me through the night. During the day we make ourselves emotionally available to our kids - why wouldn't we do the same during the night?
We have a culture that puts a lot of pressure on parents to have very independent children at a young age. Independence is just like any other milestone (crawling, walking, talking) - children develop the ability to be more independent it is not something we can force or train.
I'm sure you feel guilty or like you're a bad parent in some way if your child isn't sleeping in her own bed. Rather than thinking about what others think of you - release yourself of that - and focus on the needs of your daughter right now. She's feeling very insecure in her world. Allow her to be close to you so that you can re-establish an emotional trust which will allow her to feel more secure. The more you push her away in order to "teach" her to feel safe, the more insecure she will become.
If you want more support with this, please don't hesitate to contact me. I know how hard it can be to deal with sleep issues. Things can seem more overwhelming when you're not getting the sleep you need.