I remember going through this. We explained that Santa represented the spirit of Christmas (or something to that effect) and that some kids need to believe in Santa because they don't yet understand believing in something they can't see.

Obviously it has been a while since we actually have the talk with either of the kids about knowing the truth but preserving the belief of others. Somehow we were able to explain it well enough that neither kid had a problem and neither felt like they were hiding the truth.