I actually believe he does exist in a way similar to that depicted in the article, "Yes Virginia, There is a Santa Claus." So, when my daughter asked about it at five I said, "what do you think" she said, "I think he is real." Two weeks ago when she asked at six and said, "I don't know Mom" I responded by telling her the story of St. Nicholas and fessing up to the fact that Mommy and Daddy fill her stocking. We also watched the movie, "yes Virginia" and talked about the fact that St. Nick represents the spirit of the season - selfless giving and that in that he exists, just not as a sleigh-driving, elf enslaving fat man at the top of the world.
This article will tell you about the origin of St. Nicholas including the story I told Alice, he gave gold to young girls in need of a dowry for marriage so they could be matched well and he did it in secret. He has since been known as "The Children's Saint." The article gives a lot more detail about his life and the miracle of manna at his grave for which he was named a saint.
This article will allow you to read the original text written as an editorial in the New York Sun in answer to an eight year old's question about whether Santa was indeed Real or Not. If you aren't familiar, the answer includes this sentiment:
"Yes, VIRGINIA, there is a Santa Claus. He exists as certainly as love and generosity and devotion exist, and you know that they abound and give to your life its highest beauty and joy. Alas! how dreary would be the world if there were no Santa Claus. It would be as dreary as if there were no VIRGINIAS. There would be no childlike faith then, no poetry, no romance to make tolerable this existence. We should have no enjoyment, except in sense and sight. The eternal light with which childhood fills the world would be extinguished."
When my parents answered me in this way, I never felt lied to, just loved. It seems my own daughter has responded the same way. A minor sense of disappointment at the loss of the magic and a sense of responsibility for keeping the magic alive for others who haven't figured things out yet along with a hope in the spirit of the season and an appreciation for anonymous giving for the joy and benefit of others.