Start by cutting out your tree. This one is 4.25" high:
Sew the tree to the smaller piece of background fabric. I do actually pin the layers together. It doesn't matter where you place the tree - with this method you'll always have extra background to cut off. I highly recomment that you press towards the background.
Trim the excess background (follow the line of the tree) and add the other bit of background. Take a strip of background fabric and insert a strip for the tree trunk. Keep in mind that the sides of the tree are going to shrink up with the seam allowance.