Their items are transferred to their assigned coffin when they die.
Solitude, Windhelm, Whiterun, Riften, and Markarth all have a Hall of the Dead that contains coffins and urns for various unique NPCs who live there. Bring Out Your Dead is a simple yet immersive mod which expands on the number of graves given to the unique NPCs in areas of the game that don't currently have them.
