Would be awesome but this game is way too casual for a mechanic like this.
This game is aiming to be a AAA Mainstream MMO. Niche mechanics like this don't really fit.
There is already a thread on death penalties on the first page: http://www.gamesas.com/topic/1473224-the-death-penalty-and-the-aftermath/page-5
This would have such a negative effect on PVP that everyone would avoid fighting so they don't lose their stuff. the only safe thing to do would be to roam around in a zerg. people would flee at the first moment that they may lose. It would be destroy the solo / small ma fights because they would get run over by groups and lose everything.
In AION you only lost PVP currency but even with that people avoided all fair fights and only attacked if they were sure they had a huge advantage.
When you implement ideas like this it cause more fear than fun. people will just avoid fighting each other, there wont be any good fights, and no one will stay and try to defend a keep that has a laerger attacking force.
No. Too niche for a game like this, and from someone who plays Minecraft a lot, it certainly is annoying as hell.
Let's fill up that thread before starting a new one
http://www.gamesas.com/topic/1473224-the-death-penalty-and-the-aftermath/