Presuming you've got the advice you need from the other posts about how to explain death, I thought I'd tell you about a children's book you really must buy for the little one, that will help alongside what you finally choose to say. (Especially if it was a close relative who died.) I don't know the author, but the title is "No Matter What." A friend of mine bought it as a Christening present - we all read it at the party afterwards and it's lovely. Really sweet, but for your purpose, totally perfect, trust me!! It deals with the subject beautifully, with no scariness, and can be used to explain whatever, and however you want it to. Really, it's about love, in case it seems an odd Christening present (!) but it will serve your purpose too. I've recommended this in the past to a work colleague with two young daughters when their Nanny died, and she said it had helped enormously.
Hope it suits!!