C.,
I am so sorry you are going through this. I know someone else who was in a similar situation. Her water broke early and her baby was stillborn. She has a son who was 3 at the time. I asked her for advice and here is what she said:
Oh goodness, that is heartbreaking!
I really think it depends on the person. For us, being straight, yet gentle at the same time, with him worked best for us. For my girlfriend, she found that books worked better. There are some really great ones that she mentioned to me, but we just never found the need for them. I believe one is called "We were supposed to have a baby but had an angel instead". - that's the one she was going to let me borrow.
Anyway, the day after we lost our baby and I came home, My son and I were sitting outside in the front yard. He asked about the baby, and I simply told him that he wasn't in my belly anymore, and that he was with Jesus now. Of course, this sparked questions about who Jesus was, where he lived, and why our baby was with him. I did my best to be honest, but put it in simple terms so that he would understand.
We went through the whole life and death with him and let him know that it's how things are. People live and people die, but sometimes, there are the little babies that are just soooo special that Jesus wanted them with him right away, and they didn't get a chance to be here like we are. He took to that pretty well, and seemed to be OK with it.
What surprised me the most was how it affected him so much. That's one thing that I wasn't expecting at all, and was probably the hardest. They know A LOT more than we give them credit for. For awhile he was mad, he didn't want anyone else to have his brother, and wanted him here. That was probably the most difficult for him to understand - why someone else had his little brother, and we didn't.
My mom had gotten me a figurine of an angel holding a swaddled baby. I used that to try and explain to him that a beautiful woman like the figurine was taking care of him. He calls the baby she is holding by his brother's name now, which is very cute, lol. I think for him to have that image in his head, made it easier for him. He could somewhat put a face to the "person" who his baby brother is with.
I also found that for our family, it's best that we talk about the baby and include him in the family as much as possible. It helps my husband and I, but I also think it helps our 3 year old in a way too. So that he remembers him, and he knows that he didn't just "disappear" you know?
So really...the main two things I kept in mind during all of this was to be GENTLE YET TRUTHFUL. Keeping those two thing the focus of conversation helped tremendously!