I lost my uncle two weeks ago. He was 81 and suffered Dementia. Although it's a pretty sad situation, I have thought even deeply about the connection and relationships between toddlers and elders.
My daughter Jisele and my cousin Maddie have always had a great relationship with my Uncle. Although he didn't quite know specifics about them, what I saw was joy. It was beautiful (and funny). They understood that he had limitations and equally he understood that they were children. While, he may not have recognized them as his nieces, he understood that he was the adult in the situation and he had no problems with reminding them. My uncle and the girls had a bond, they knew it and so did he. I immediately, became reminiscent of my oldest daughter and my great grandfather.
My great grandfather and my oldest daughter were really close. He didn't suffer any memory loss and always remembered who she was. She recognized he was limited in his abilities, but she always felt he was the "go to" person if there was something that wasn't going her way.