You know, this can be a difficult issue -- but not for most children. The vast majority of kids seem to go through a preschool phase of wanting to spend all their waking hours in a tutu or Batman tights and cape, and the other kids don't even notice. Once you get to school -- particularly once the children are past kindergarten, so say around the age of six -- they start to develop a sharper awareness of the other kids, and how they themselves fit in with everybody else. They often naturally fall in line with each other. I noticed that in kindergarten, my daughter still wore a ballerina skirt to school, but other kids didn't tease her. In fact, she wasn't the only girl who wanted to do that. Many of the little girls were still in their 'fairy princess' stage! By grade one the bloom was coming off that rose, and certainly by grade two she wouldn't be caught dead dressed in something unconventional. (She still likes clothes though -- although at this age, they aren't the focus of her life).
It's different if it's cross-dressing -- in particular, if it's a boy who wants to wear traditionally feminine clothing. For example, one of my daughter's friends is obviously transgender, and this has been clear to everyone from a very early age. He was constantly raiding the preschool's dressing-up box for floaty costume gowns and beaded necklaces (along with all the other little girls!), he wasn't interested in playing typical boy games, or in fact with playing with the boys at all. This was no problem when he was in preschool, but once he went to K, his parents knew he was going to have to face some bullying challenges along the way, and they had to figure out how to minimize this. So they let him keep his hair quite long (for a boy), but otherwise he had to dress like a boy -- i.e., no skirts or frocks. But, for his peace of mind, he was allowed to keep his hair barrettes and lip gloss inside a shoebox in the cloak room, and put them on after school. So far he's doing pretty well. Kids seem to accept his femininity. Mind you, he's only eight. We'll see how things go as he approaches his teen years.
So, back to the boy in the purple Minnie Mouse leotard: this is an example of cross-dressing, and by the age of five, kids can be weird and unkind about that sort of thing. It's not like a little girl wearing a tutu to school. I'd let my daughter do that at the age of five, but not my son -- although if he wanted to do that AFTER school, or when good friends were over to play, then no problem. I don't think the boy's parents were intentionally setting him up for bullying; they probably thought they were being sensitive to his needs and desires. However, I think they chose incorrectly.
By the way, if the boy had been three or four, I don't think he would have been teased by the other kids (other three or four year olds, that is).
Sorry, this was long, but because of my daughter's transgender friend, I've thought about this a lot!