Hi C.,
This is hard because your dog is like a member of the family. We had a similar situation with our boxers before our kids were born. The bigger one LOVED kids, however he showed it by knocking them down and licking their faces, which understandably terrified the children and their parents! We solved that issue by taking him to training (lots and lots and lots of training, fortunately it was not too expensive because we went through the SPCA for it). However our smaller boxer HATED kids, small dogs, anything little that moved erratically. We took her to dog classes but it didn't help - the trainer told us she had likely been traumatized when she was a puppy, and would probably never get over it (she was 4 years old when we got her).
When it came right down to it, I just wasn't comfortable having a dog like that in my home! I couldn't guarantee that she wouldn't get out of our yard, even though we had a sturdy 6 foot fence, and the thought of what could happen if she did get out and saw a child outside... well, that was enough for me to find a new home for her. Fortunately, my husband's ex-wife took both dogs in (we didn't want to separate the dogs), and she lived out in the country and didn't have kids, so it was perfect! It was hard letting our dogs go but I just couldn't bear the thought of compromising any child's safety for my own selfish need to have a dog.
I hope that your dog will respond to training, but be aware that he might not. If he doesn't, I think the best thing to do would be to find him a home that doesn't have children. Even little dogs can really hurt kids, and once a child ends up hurt, you're liable and the dog will likely be put down by animal enforcement. That's a losing situation for everybody, so it's best to make sure that doesn't happen!