This is a tough one for us. DH and I both hate smoking with a passion. We both grew up with parents who smoked--his mother still does, in her late 50s (and his stepdad still smokes cigars way too often, though he quit cigarettes after a heart attack), while my parents both quit when I was about 7 and they were about 40. I like to think I helped harass them into quitting.

Anyway, DD is now almost 2 and it won't be long before she starts noticing smoking, asking questions about it, or something to that effect, because her grandmother smokes and so does her uncle (DH's younger brother). She certainly also sees her grandfather smoking cigars. In fact, MIL mentioned in passing after DD had stayed a couple of days with them over the summer that oh yes, those two outside chairs were where DD would sit with Pop-Pop while he had his cigar. I didn't say anything at the time, although I was livid, but DH and I have agreed that before she ever stays with them again, the law will be firmly laid down that DD does
not hang out with Pop-Pop for a "smoke break."
(Side note: they are really wonderful ILs and terrific grandparents in most ways, and I think they do try to be considerate about their smoking, but sometimes their cluelessness blows me away. We went to visit them to share our pregnancy news back in early September, and we were across the street at their neighbors'. Yes, we were outside, but literally, both MIL and neighbor woman were smoking cigarettes while FIL and neighbor guy were smoking cigars. Outdoors or no, there was nowhere I could be where it wasn't blowing in my face--this after I had just told them I was pregnant!)
With our kids, we want to set out the strongest message we can that smoking is a very bad habit, it smells bad and it's dirty, and it can make you sick and make the people around you sick. But we also have to explain to DD and her soon-to-be brother that yes, Grammy and Pop-Pop and Uncle Jeff smoke, and we wish they wouldn't, but it doesn't make them bad people, that good people can make unhealthy choices and get bad habits.