Beccy,

I believe that the most important thing you can do is to play and sing music with your children. You set the model by doing it yourselves. The five-year old will probably not be motivated to practice on his own, so you'll do best by practicing with him/her.
As soon as possible, get the five-year old to build chords in standard tuning. ( Maybe two guitars, one in each tuning.) You might think that kids would get confused about this but they don't have the same learning "disabilities" as adults because it hasn't been trained out of them.

The best thing you can do for your three year old is to start singing regularly with him/her. A toy guitar or whatever to fool around with isn't going to be a problem with one the exception...remember he/she eventually needs to know the difference in that real musical instruments are not toys.

The more you participate with your children, the more likely they will get involved and eventually involve their children. And be sure to have fun with it. That's the most important.

Frank