When you buy power tools, consider buying one of the newer systems that works off an interchangeable rechargeable power pack. That way there's no cord to trip over and the tools are completely portable.
Teach your child to be careful when carrying tools. She should always hold the sharp edges or points downward and away from her body. When handing a tool to another person, hand it to him handle first.
If you have any intention of working with wood on a regular basis, you'll need some tools. Many of these tools can be found in any basic home repair tool kit, so they're not something you have to buy especially for this craft:
Metal tape measure (the retractable kind is nice)
Pliers (slip-joint pliers are probably best to start with, other types can be added as needed)
Crosscut saw-add other types (keyhole, coping, miter) as needed
Hammer-start with a curved claw hammer and add other types as needed, such as ballpeen and tack hammers
Nail set for recessing nails into wood
Screwdrivers (both Phillips and regular)
Rotary hand drill (this looks like an egg beater; it eliminates the need for a power drill and bits)
Bar of soap
Vise (this jaw-like device is mounted to a surface and used to hold an object firmly while working on it. It's a good idea to use a vise when working with children who are cutting, sawing, or drilling; it helps with painting, too)
Sandpaper (in various grades, from fine to rough)
Some power tools you may want to have that you'll use yourself (or supervise an older child with) are:
Power drill for drilling holes. Some can also be used to drive screws into wood or remove them
Circular saw for cutting wood
Power sander for finishing wood and preparing for paint or stain
Don't even consider buying low-quality tools for your child if you're in any way serious about creating an interest in woodworking or carpentry.
Instead, buy high-quality tools you can adapt to a child's use. For instance, screwdrivers come in various handle lengths. Buy some with shorter handles so your child can hold them easily. Let your child use a tack hammer for driving small nails. (You may have to drive larger nails with a full-sized hammer until your younger child is able to handle a full-sized claw hammer.) Don't assume children can't use a tool until you show them how and give them a chance to practice. You may be surprised!