A. You could try to stifle her ("Aunt June, we're teaching Christopher that all people deserve respect"). Defending those who are unfairly maligned is always the right thing to do. And you'll be setting a good example for your child (who'll soon get the gist of these conversations) by sticking up for your beliefs.
But confronting your aunt is unlikely to change her. She's probably been verbalizing her bigotry since before you were born, and her beliefs are entrenched. Plus, a happy family gathering isn't always the appropriate setting for a confrontation, even though that's where they always seem to occur in my family.
My friend Marie (whose name has been changed to protect her standing among relatives) has an uncle who's been known to make racist, sexist, and homophobic remarks. "I'll let his comment pass at the time," says Marie, "but later on I'll remind the kids that although we love Uncle Henry, we don't think the same way he does." Of course, there are times when she's tempted to engage in a verbal slugfest with Uncle Henry, but it wouldn't necessarily benefit her children, who might be upset to see their mother doing battle with their otherwise kindly great-uncle.
If you're concerned that your aunt's politically incorrect attitudes could rub off on your toddler like bad germs, don't be. You are the most important moral influence on your child, and what you say and do has a lasting impact. But you do need to speak and act -- values don't get passed along through genes or by osmosis, and even a young child can begin to grasp such virtues as respect and kindness. Let your little boy see you helping someone less fortunate and being tolerant of differences. A few years from now, if your aunt is still around, you might even get to hear him enlightening her after one of her remarks, and you'll know you've done your job.