The first thing to remember is not to tell lies. A child at a young age is extremely impressionable and has immense trust in his parents. Eventually the parent has to come clean and deal with the truth and when the kid knows his parents had been lying all along, the trust is broken.
While some would think that the truth could be too explicit, honesty is always the best policy. The trick lies in telling them in a way that is not offensive, nor damaging.