Rule of thumb is 1 litter box for each kitty, plus 1 extra. I would definetly go with 2 litter boxes. They don't need much space and going upstairs isn't a problem. Actually one on each level is good idea.

I use clumping litter for mulitple cats (Tidy Cat) I've tired the clay don't like it. I'm out of the child bearing years so can't comment on the effect. However, I've always used good common sense when cleaning and scooping litter boxes. Washing your hands afterwards and keeping the litter box clean is good routine to get into under normal circumstances.