Oddly enough, I watched episode III a few weeks ago. My son had tuned out by then, he was just running around having lightsaber duels with our dog. But my daughter, who is 8, was following it closely. Still, she didn't really get that Anakin was going to kill the kids. She assumed he was there to protect them. I wasn't going to spoil that one for her.
She had watched him be the good guy through Episode II and most of III, so it was not an easy transition for her, even knowing he becomes Darth Vader.