Before I started doing the blind cuts, I cut the fret tangs a bit short and just filled the slot ends with sawdust and glue. It's virtually invisible with a dark wood like ebony.
Since I started cutting my own slots with the CNC, I can just stop short and save myself the trouble.
Binding with the same wood is an interesting idea, but I'd probably do the filler first. Even if the filler shows (like on maple), it's better than having fret tangs sticking out.
As for the bits I use, I've happy with the selection from precisebits.com. They have a section for luthier tools. I got the .023" bits to match the fret wire I use. I suggest getting at least 2 or 3 bits - they are quite delicate.