Um....wow. :)
Yes. It's time to let the little people go, like....when children reach kindergarten. I absolutely let go of a perfectly good toy just because my children have lost interest in it or have outgrown it. That's EXACTLY when they should be given to someone less fortunate! Or AT LEAST sold on craigslist or a garage sale. You don't donate trash, you donate good things that aren't getting love anymore....and taking up space.....right?
As for the kids wanting to keep EVERYTHING, you could handle that several ways. The way WE do it in our house is this: the kids know there are children who don't have much. We've been involved in outreaches where we've fed or made giftbags with gloves/caps/socks, etc for the homeless, we've volunteered in foodbanks and nursing homes, they've gone to play with the children at a shelter a couple times while I helped with a show for the children. My 5 year old also had a family in one of his clubs who was in real need and we donated some things to help with their emergency situation, and it really hit home because he saw this boy every week, he was "real" and not just an idea or theory. Doing things like this can let them see that not every little thing is of "dire" importance to them, and it's easier for them to give stuff away. I personally set aside a couple things that are very special to them; I know their toys and personalities, and when they outgrow something, it goes in a chest. I have some of their baby socks (that I use, thanks to a suggestion on mamapedia, as my own version of an advent calendar), I have special shirts that were their favorites, or their jerseys, or whatever. I will make a quilt out of their favorite childhood shirts through the years, they'll have a few of the "most" favorite toys through the years, but all other clothes and toys get donated. I do have to admit that I almost cried after donating the big stroller, not because I gave it away but because it was a reminder of babies. The kids saw that so I just laughed and said "This is how I feel, but it's kind of silly. I have reminders of you big boys back when you were babies all over the place: pictures! And lots of those pictures have that stroller in them. It's been to 6 other countries, it's been through all kinds of adventures with us, and I remember the day daddy and I were walking around and picked it out. We picked it out because....and told a few cutesy stories about it, then it was over. It was healthy I think to be honest about feeling an emotion, cherishing a time period, but allowing it to go away now and be of help to another young family that would be feeling the same way we did when we bought it.
At the beginning of October (the beginning of birthday, Thanksgiving, and Christmas season) we take a few weekends and go through the bedrooms and the playroom and clean it out. Give away, throw away, keep stacks. I go through and assist them with it, we keep some things that Joseph doesn't want, that he can pass on to Victor (little brother). When Victor outgrows it, it goes away. We don't make it like a whip-cracking experience but more like a "Let's take some time to be really happy and grateful for how blessed we are. Look at all this! What do you think would be helpful to another little boy?" If they want to save for a special trip, event, or toy, they can pick out some stuff to sell or donate (because Santa Mom does take note of that). We also discuss if it's donate worthy or trash, or if we can fix something to make it donate worthy. We do it again at the beginning of A., with spring cleaning.
But yeah: Little People toys---if you're not planning on having children, they can be sold for another toy that the kids want, or donated to make room for a cleaner playroom or the upcoming Christmas season. :)