When T-shirts don't fit anymore, passing them on as hand-me-downs are the easy and most practical solution. My version of "hand-me-downs", however, involves some tweaking making even the biggest T-shirt fit the smallest member of the family.
Once an adult's T-shirt...
...Now a baby skirt!
I was thinking of making a T-shirt for a toddler but I decided a little skirt would be easier. I didn't use a pattern -- I just winged it with a pencil and ruler. Another hand-me-down idea is to make pajama pants. You'll find the demo here.