There are 3 rules:
Rule #1: Stay on the boat
Rule #2: Stay on the boat
Rule #3: Stay on the doggone boat!
Pfds should be 2nd nature - luckily today's Pfds are way more comfortable than those in my childhood.
Get them involved in helping with the boat as soon as possible - make them feel part of the crew, not just passengers, even at a young age. (and even if they just think they're helping!)
Teach them to row early, and get them into a small sailing dinghy as soon as they are able (6 or 7 yrs) Tremendous self confidence can be gained by "skippering their own boat".
Don't yell at them.... ever.
A bit of fishing line, a small hook, and a bucket.... an afternoon's amusement at any dock.
Seek out other cruisers with like-age children - some friends-for-life can be made.
Make sure they are avid readers... much easier to pass those rainy days or long easy passages if they are able to occupy themselves and learn something at the same time.
Swimming lessons so that falling in doesn't scare them, and so they have another fun way to spend a warm afternoon.
Sit back and watch them grow into capable, confident sailors in their own right!