I don't think the "half-German" thing is as big an issue as it once was. My dh's Dad is German, born in 1945, and dh's Grandma was in the Hitler Youth etc ... Grandfather was in the Luftwaffe. Dh has a German name, we have a German surname.
Dh was teased a lot at school about it (not helped of course by his mother once sending him to a fancy dress party as Hitler ), but even though dd1 (9) has done about Anne Frank in school, it was her that brought the German connection up in class and no-one teased her at all. I suppose she was quite interested in it all as she has visited Anne Frank's house in Amsterdam with me. She was actually quite proud of the fact that her Opa comes from Germany and just says "the war was a long time ago".
We have explained in a child-friendly way (and the Anne Frank story is quite good for that) about the Holocaust but children of that age I think are shocked but find it hard to take in. Our church also did a service which covered the story of Corrie ten Boom, which was a different perspective on it. It does have to be done in the context of the whole war, the British were hardly blameless - my dh's Aunt was born in a bomb shelter in Hamburg at the height of the bombing there.
We talked about the war with them all last year when we went to Normandy. I think the German connection gives them an extra perspective and makes them interested, but it is long enough ago that it is "history" rather than memory for everyone except Omi (great granny).
I hope you can find a way to talk to them about it which makes them proud of their heritage, even though many of the things done were so very wrong. Do they speak German? Its a great regret of mine that FIL never spoke German to dh - so my O level German is better than dh's! If they are bilingual you might be able to find some German resources to help?