[MunchkinMan]

I'd argue against calling it overpowered, but you have the rest of it correct. A Tough Zombie only discards his hand after dying. If he has no cards in his hand to discard, it changes nothing, because the card is pretty direct: The only ill effects one would suffer from death is having to discard one's hand. No hand, oh well. There are no other ill effects to suffer. Since Looting his body would mean he'd lose his stuff, that's an ill effect. One which a Tough Zombie doesn't have to suffer.