This blog post not only contains some valuable information about the handling of death in a virtual world, but the comments provide some critical insight into the variation of ideas around this topic...
In this particular post, when talking about Facebook the following processes are apparently expected to happen in this case... " First, it preserves that user's identity online so that people can come to the page, read about him or her, and leave posts on the Wall in remembrance. To those of us who live our lives online, there's little more terrifying than the thought of completely disappearing, and we like for our friends who have moved on to stay around online as well.
However, we don't like to constantly be reminded about that person's disappearance, so when Facebook converts an account into a memorial, the person in question no longer pops up in Facebook's friend suggestions (that would be awkward). The person's profile also automatically becomes private to everyone but confirmed friends, so vandals can't come by and trash the place without anyone there to clean up. Contact information also gets removed, and no one can log into the account in the future."
According to wikipedia (http://en.wikipedia.org/wiki/Social_media_and_death) the process currently held to be appropriate by Facebook is generally accepted as the most through, generally if for no other reason than because they are making it clear cut to users that they hold no right over thier own content or information once it is posted on;line.
Facebook's policy on death is to turn the deceased user's profile into a memorial, "as a place where people can save and share their memories of those who've passed." Memorializing of a profile involves: the deceased user no longer showing up in the "Suggestions" box on the right-hand side of the homepage; the privacy setting is altered so that only confirmed friends can view the profile and search for it; contact information & status updates are removed; no one is able to log into the account in the future.
In order to memorialize deceased person's account, a special contact form must be filled out. In this contact from, a proof of death must be noted, such as an obituary or news article. Both family members and non-family members are allowed to submit this form.