We usually give the characters the money as noted in the DMG.
Usually, everbody buys wellrounded equipment, so there was never a need to limit the maximum amount spent per item. (Usually, you will get more bang for your bucks if you have multiple cheaper items than a single expensive on)
There is still a problem with replacement characters. If a character died, the new usually starts one level lower than the rest (or at least a few XP, so that sometimes, he will be behind, sometimes not), and the regular wealth per level, but if the died characters items are still within the group, this unbalances these.
Recently, a character in my Diamond Throne Campaign died, and one of the characters decided that the loot of the fallen comrade would go to his family (whereever it might be), which seems a quite reasonably way to handle it.
Mustrum Ridcully