Illuminations can be be seen from La Cantina de San Angel in Mexico (counter service so arrive nearly 90 minutes early) or at the Rose & Crown Pub in the United Kingdom (make reservation 75 minutes prior to Illuminations & ask for patio seating upon arrival). Because there aren't any guarantees, I prefer to have dinner then find a spot for us early then we get off our feet and enjoy family time -- maybe pack a few toys, games (Disney UNO!) or splurge on the light up toys that are sold beforehand to keep the kiddos entertained.
Our favorite spot to watch Illuminations is the bridge that connects the United Kingdom & France. Disney Dad Marc also has some favorite spots as well; just click
here. A great thing about Epcot is that it is so large it can accommodate many guests, so as long as you pick a spot along the lagoon with no obstructions, you should be fine. I'd also try to be upwind so smoke doesn't bother your little ones.
Fantasmic was something we were concerned about as well when our children were younger; it is a wonderful show, but it does have some dark & scary moments. Before we first went, I did watch several videos of the show on YouTube. When we felt our sons were ready, we did try to have our seats toward the back of the auditorium in case one of us would need to be make an early exit. I wish I could say a definitive yes or no, but each child handles things so differently. Don't tell anyone, but our 16 year old still avoids The Haunted Mansion!