Children are not well served when we treat death as if it's some secret too frightening to be endured. Your son may understand the idea of taking turns. Every person, animal, and plant gets a turn at living its life. When their turn is finished, they die so other people, animals, and plants can have their turn. For most of us, our turn is over when we are so old, tired and sick that we aren't enjoying being alive any more.
A three-year-old won't understand the finality of death. He will probably gradually forget Granddad except as recalled in family photos and stories.
It's quite okay for your son to see you grieve, as long as you don't get so lost in it you are unavailable to him. He'll be learning how to handle strong emotions and loss by watching you. The death will probably be far more emotional for you than for your son. He may ask a couple of questions, be sad for a little while, go play, and repeat the whole sequence a few times a day. Toddlers do not tend to stay focused on grief for very long.
I would avoid associating death with sleep, because this makes some kids dread going to bed at night.
Hugs to you all.