I'd like to add my voice to the crowd saying that there should be no game rule regarding what to do with a fallen friend's equipment.
IMC PCs seldom exist without families and/or friends. Most of them are closely connected to the campaign setting. Furthermore, PCs don't wander the earth having adventures. They may travel a lot, but they always come home between excursions. If the subject had ever come up (it hasn't - not once), I would have dealt with it in story, not through any sort of rule. Even if the family couldn't prove that they were the legal owners of their relative's property, they could damage the party's reputation by calling them thieves.
Most of my players are very concerned with how they are viewed by the populace. In my upcoming 4e campaign, there is a stele inscribed with the names of all those declared heroes by the duchy since its founding. Several players have already expressed an interest in getting their character's names on that stele at some point. A good reputation counts for a lot.
BTW, few people in the region care if the PCs loot and pillage savage humanoids (or even foreigners) and their tombs. Those are the acts of daring that the public admires. But if you steal from the locals, or violate their tombs, that's another thing altogether.
If I had a character who didn't care about reputation, I'd work out the appropriate story ramifications, but wouldn't levy an unreasonable penalty in an attempt to force the player to do what I want them to. Every action has an appropriate consequence, but you have to be careful not to cross over into railroading the PCs.
I remember one of the Freeport modules, where our low level characters got into a fight with some orcs and ended up with a powerful magic item that the orcs had been commissioned to retrieve for a wizard. We kept it and used it, despite his argument that it was his. We were quite surprised to receive a summons to court. We were being sued by the wizard. I thought it was pure genius on the part of the GM. Since we were only 2nd level, we thought we were going to get it for sure. Luckily for us, we were able to do enough favors for the judge to swing the judgement our way, despite the wizard's greater status and wealth (he bribed the judge with money). Later he came after us, and we had to kill him. It had become a point of personal honor, since we'd beaten him in court. It was a memorable part of the campaign.