Some interesting questions, to which I pose a few counter questions and a half answer.
The half answer is communication, which is the basis of all effective conflict resolution. Fairness in my experience is something that is unsatisfying if players have it forced on them, at any age. Its one of those things that people need to learn from either their peers or family or through the story. In addition, there are plenty of situations where "fairness" really isn't, or shouldn't be a factor. I find that collaborative storytelling and roleplaying is better at encouraging fairplay than the idea of a GM god. Players know what's fun, even at young ages, and typically they like to see everyone at the table having fun. Sure, this may branch out into conflict or over rewarding certain behavior at bad times but with a little deconstruction afterwards the experience can be a good one. Asking the simple question did you like it can answer scads of others or at least lead to solutions.
Your six year old may want elements in the story that you might not be aware of, and is likely to get left out or live in the shadow of the 8 year old, and likewise your 8 year old may feel railroaded by being forced to do stuff the 6 year old wants. One way of getting around that is by allowing everyone to have an influence in the story, while the other is to take firm hold of it yourself and try to anticipate and balance their desires. In the end you just have to decide what works for you. I really like the RPG.net thread where a father plays heroquest (the rpg) with his 5 year old. I dont have the URL but I bet its googleable.
Is pulling them out of the story necessarily bad? In our rpg experience it used to be that one person was in charge of the story, but this runs contrary to games kids play at that age (whether it be War in the backyard or one of those complete the story games). Maybe they can have a good time exercising the gm part of their brains, or at least maybe they'll learn to tell a good story. I think the best way to do it is to cast conflict as a scene, figure out the result and then tell everyone what happened. Which breaks the flow of the game a little, but IMHO no more than stopping to roll out combat in D&D. Im not sure that Im right though so Id be glad to hear any response on the subject.
2. I like the declaration (paraphrased here due to language filters) by D. Vincent Baker the writer of Dogs in the Vineyard. Basically it boils down to "Don't be a jerk!" Of course his other declaration is also "unless you want to say no say yes." Taken together the two ideas have some interesting implications on play I think. On the one hand, it basically says to be aware of other people and don't score points off their misery in the game and on the other it says don't limit the imagination of others unless you plan to make it a conflict. I like that.
I hope I made sense.
Do you have any suggestions that might make the system run better?