We kept the memories of "Granddaddy" alive through everyday conversation. We told specific stories about "Granddaddy" and also brought his presence into every day scenarios. My husband and I comment on how much Granddaddy would have loved snuggling with them while watching "Cars", or how he would have shared his homegrown tomatoes with each of the kids.
One of the most effective ways that we keep my dad's spirit with us is by creating a book all about Granddaddy. I printed out old pictures of my dad and added little vignettes about him and his life.
My kids talk about Granddaddy like they know him. He is present in their lives.
You would change your approach, depending on your religion, but this book really helped us discuss heaven, religion, and death.
This is just one little way to help keep your loved one's memory alive in the lives of your children. It has made a huge difference in my life. I still miss my dad every day, but it is a wonderful thing to hear my children discussing him, as if he were in the next room...