When I think about it, Nintendo really did never say "die" when it came to OoT Link being "defeated" in the third branch Timeline, but... I actually can think of NO OTHER WAY it would have went down! When you're going up against Ganondorf/Ganon in that, Link is pretty much prepared for a fight to the death and Ganon is... let's face it, in his young glory-days of slaughter and mayhem. He's not shy of killing - killing the king, the Great Deku Tree... executing Gorons by dragon... I figure the "Defeat Timeline" is supposed to be what you imagine when you get a Game Over during the Ganondorf or Ganon fight. DEATH!
Otherwise, it would be a fate worse than death for Link. I actually wrote a fanfic about that... Link lingering on until an eventual death (my scenario being much more excessively nasty that Nintendo would ever do). Even if he had a "gentle way" - sent off to go live with the peasants or something, do you think it' going to be easy for him? This is LINK. He will fight until hi last breath to stop Ganondorf and retake Hyrule. Though Nintendo may be pulling a "never say die!" ala children's cartoons of the 80s did to shield the fragile minds of players attatched to him, we all know what happened. It really is the only outcome that make a lick of sense.
As for games where the hero/protagonist of the story has an ill fate and you feel guilty for completing the game? Try Shadow of the Colossus. - Although that game involves a little guilt throughout playing it, and is beautiful for it. I won't give away the ending, it's... kind of bizarre, actually, but the entire game is a tragedy - in the very best and most beautiful of ways.
I would want a Zelda game in which Link dies at the end, but only if it's in a self-sacrificing manner, as in it's his last act of living in order to ensure the safety of Hyrule. I wouldn't want him to die directly at the hands of the enemies, or in a cheap way like with Aeris. I would want to be the one directly in control and voluntarily give my life for others; it's a videogame, after all.
The idea I've been tossing around is this: Link goes against the big baddie and defeats him in battle, just like in every other game. However, instead of the final battle taking place in his fortress like almost every other villain, it's taking place next to some doomsday device or something of that same manner. Have it be the goal of the game to stop the villain from setting this device off (maybe have it being alluded to throughout the game but reveal the true nature of it sometime during the latter half so it doesn't just come out of nowhere). Have us defeat him just like we normally do, but in his last moment he ends up doing the very thing we've been fighting to stop (or maybe have it be to where his death sets off the bomb). Now the only option left is to get that thing out of Hyrule itself. No cutscene where it's force-fed to us, not even any dialogue explaining it, just stunned faces from everyone involved. The only thing that would hint at the right option is this: throughout the game you're able to use some means of transportation to lift heavy objects and fly around (if Nintendo wants to put a form of transportation in a Zelda game again, that is), so as you're staring in abject horror at the doomsday device you notice a latch on top and an open tunnel leading outside. You notice it, but you don't want to think that's seriously what the game wants you to do. So you try everything else in your inventory but don't put so much as a scratch on the bomb; it just keeps ticking down. Finally you're forced to face the fact that you need to pick it up and fly it out of Hyrule yourself, sacrificing yourself in the process (think the ending of Dark Knight Rises but without Bruce Wayne coming back). You've done the thing no one else can do; sacrifice yourself for the survival of the land itself.
I think that's a good idea.
If done in-game, I'm not sure I'd like an off-screen death like this. It's too ambiguous - perhaps even more than the after-the-fact Hyrule Historia decision. I think I'd like to see the ultimate Game Over - have a cutscene in which we watch him sacrifice himself for Hyrule and know that's what happened. Perhaps we cut to Lady Zelda dedicating a memorial statue and/or a scene in which Link comes to her in spirit-form to say a last goodbye. Perhaps there's a line about the eventual rebirth of the Hero's Spirit when Hyrule needs him again.
Or maybe something like this - there's a group of children being led through the palace garden by an aged teacher and he's explaining how the Hero (Link) gave his life to save the land and this is the statue commemrating his courage. One little boy steps out of the crowd, looking up in awe at the statue. He's got blond hair, blue eye, distinctive green clothing and a little toy wooden sword...
