First, my sincerest condolences. I can relate somewhat to the experience of losing a loved one so close to the holidays (I lost my mom to diabetes about a year ago in December '07). I can only imagine the grief and sadness you and your family must be enduring at this time. I will keep you in my prayers, that the Lord may provide comfort and solace to you and yours as you try to get through this trying and emotionally exhausting period.
As for advice on how to proceed with your niece, I don't necessarily know if I have any. I'm sort of in a similar position, in that my niece has really gotten into the Bible (she's 10 years old, and started reading this picture book of Bible stories that I myself used to read when I was a kid). I never really went out of my way to teach her anything about God and Christ when she was growing up, mainly because I wasn't so sure of things myself (this was before I started learning these truths from people like Ray and others on the net and, as well as enlightened friends of mine). Now that I know the truth, I'm wanting to guide her, since the stories she's learning may or may not support the nonsense of hell and things of that nature, and I don't want her to get attached to those ideas. But I'm hesitant to do so ever since my dad got her a "tween" Bible for Christmas, undoubtedly filled with words like "hell" and "forever and ever" that would have her believing that stuff. And while I recognize that it may be in The Plan for her to learn falsehoods first to really appreciate the truths later on, I’m still wanting to guide her and let her know that God’s love and character are not the sadistic and illogical mess that mainstream Christianity would make them out to be. And while her mom (my sister) is not opposed to her learning about Christ, she herself is not a practicing Christian (though she holds basic Christian beliefs), and tends to believe what the majority believe, especially about the soul going to heaven and things like that. Like you, I don't want to plough ahead because I don't know how receptive my niece, or my sister, will be to these truths. So, I find myself having to hold back, and waiting for the Lord to provide an opportune moment. Anyways, I’m rambling here.
I guess if I had to throw in my two cents worth, I'd let your niece come to you with the questions, and answer them as best you can (how old is your niece, if I may ask?). Otherwise, as George (aqr) said, just be her uncle, and just be there for her. If your niece believes that your sister is in heaven right now looking down on the both of you, I could see it being really iffy to try and convince her that she isn’t (but that she's merely sleeping until the ages to come), especially at such a vulnerable and emotionally turbulent time like this. I know my sister, dad, and niece believe that my mom is in heaven with my grandmother right now, looking down on all of us, and they derive some comfort from that. I’m not all that eager to go and ruin that comfort, regardless if I think the truth is so much more comforting (it’s like telling a kid that there is no Santa Claus……you come off as being a complete jerk for shattering their happiness and fantasies, no matter how good your intentions are

). So, I just play dumb, until the time comes (and hopefully the Lord will tell me when that is) for me to reveal what I know.
Anyways, don't know if that's helped any, but I will pray for you regardless.
Take care, and may the Lord comfort you and yours at this time.
Kind regards,
Rob ^i^