Hm. I have to admit I didn't really know what to do with the boys about Santa. We got an adorable picture of Santa (a sweet man we actually know, a big burly biker with huge hands, holding my 2 month old sleeping baby in his hand) just on a whim, and that made us want to do Santa photos every year. We didn't really talk about him much when Joseph was 1 and 2 (he called him "Ho" because he wasn't sure of his name, but knew he said "hohoho"). But starting at 2 yrs old, we'd do the Santa letter (where you receive one) for his scrapbook, b/c it's cute. A little at a time he was introduced to Santa (last year at age 4 was the first year he got that Santa brings toys; he used to just be happy with the candy cane after you take a picture with him, or at a parade). I was a little unsure of the "lying" thing, but then I remember that when I was 7 or 8 and my cousin told me, I went to her and said "Mom, we need to talk." very seriously, and went to a back room and closed the door when she came in. Mom knew I meant business and I said "Kim said Santa is not real. Is he?" and she didn't lie. She just said, "Well, there's the story of Santa, and the good feelings that come with it, but no Santa doesn't come down a chimney and visit homes.....no, he's not real. But please don't tell your baby brother". I was ok with it. I understood what mom was saying (she went into the story, and why we celebrate like we do, etc) and I felt like I was a big girl for having a special secret that the baby couldn't know, and it made me have a warm feeling in my heart toward my dad who stood in the freezing cold rain in the middle of the night and rang a bell and said "hohoho, merry christmas" to get us excited that Santa was out...that year, I remember how sweet I thought that was when he did it (29 years ago!) But our Christmas season is so FULL of "stuff" (parties, community events, charity projects, guests, games, birthdays, church stuff, winter activities, etc) that Santa is just a small part. We stay very busy doing loads of things and planning ways to bless people, being thankful for our blessings (which is why I love Thanksgiving being the "kickoff" to the season), and talking about what God's done for us and what that makes us want to do for others, how we want to be like Him....so while the kids love to take a picture with "Ho" and we read stories with Santa, get a letter to/from Santa, lay out cookies we made, and open presents Christmas morning, he's not the only or biggest star of the season. And when they ask, we'll tell the truth, and why we do what we do. He stays on the "peripheral" so that it is more of a game than an overly elaborate "lie".
In the meantime, while we did Santa growing up (and Santa with my kids now), NO my children don't think movies and the movie characters are real. That never crossed my mind to tell them. My 2 year old knows that cars don't talk, wicked witches aren't real (or at least green and turning into black dragons), and neither is any other character. We play pretend all the time. But they know movies and TV are just pretend to entertain us. We will still have a LOAD of fun at Disney World though! But it's a load of fun in a world of pretend stuff, not "real". The tooth fairy and Easter Bunny, again, very low key. They know the Easter Bunny, but he really doesn't come up until the morning of. We spend the week leading up to Easter Sunday with our own spiritual stuff, and Easter morning we'll have a surprise (not necessarily in the morning----just "some time" during the day....you never know when the Bunny will strike). But that's fun and a game, and then back to what we were doing-----how about our other special parts of the day. Tooth Fairy hasn't come up yet, but....whatever. He can have a dollar under his pillow whether he believes or not. Again, we'll not let them be completely unaware of what's going on, but the story is delivered more like a game than like "I'm serious, this is the truth". And if they flat ask, I will flat answer. They deserve that much. I want them to have fun, and experience the "magic" of a holiday too. I just also want them to know that when they seriously say "I have a question", that they can KNOW I will give them the best answer that I'm capable of providing. I don't judge people that do OR don't do holiday characters like Santa. I get annoyed with people who judge one way or the other though. Fortunately, I'm not really in contact with anyone who openly does that, that I know of.