I have a 3GS still, that I purchased in March 2010. So I'm only 13 months into my contract, so I'm not looking to upgrade yet. The 4 has a beautiful screen, but honestly the 3GS does most of what the 4 does (such as multitasking, wallpapers, etc), so it did not justify the cost for me at this time. Bear in mind, the 3GS is only available as a 8GB phone--if your media/app needs are beyond 8GB, don't do it. For me, I had to get the 32GB model, because of my massive movie and music collection. I have 80GB just in music. If there was a 64GB iPhone 4 I would have probably taken the plunge. I'm waiting for 64GB of space or something much more compelling before taking the jump. I do believe the iOS 5.0 will support the 3GS, although the 3GS would not be able to do everything that it can do with iOS 4.x. History shows that the iPhone 3G could do iOS 4, but at a much reduced functionality.
Based on your comments, I think the 3GS would be a great purchase for you both.