I went this route:
Keep the sword.
The disadvantages to this approach are:
Clavicus Vile's followers do not like you.----- That was fine for me.
You do not have a Daedric artifact to use for the Blood of the Daedra quest (although any of the other 14 artifacts can be used instead). ------ Fine for me
Umbra ceases to be a quest item, in particular it is now 45 pounds in weight instead of 0.------ I took it and put it on my trophy shelf, so weight didn't matter.
Clavicus will become outraged with you, but although he threatens you, there are no visible repercussions in-game.---- I let him rant then I left and never came back, except to run though there on the way back to the Imperial City from time to time.. lol
"The Umbra Sword was enchanted by the ancient witch Naenra Waerr, and its sole purpose was the entrapment of souls. Used in conjunction with a soul gem, the Sword allows the wielder the opportunity to imprison an enemy's soul in the gem. Naenra was executed for her evil creation, but not before she was able to hide the Sword. The Umbra Sword is very choosy when it comes to owners and therefore remains hidden until a worthy one is found." - Tamreliec Lore. http://www.uesp.net/wiki/Morrowind:Tamrielic_Lore
Which is why it appears in different games being used be different NPC's.
Morrowind: http://www.uesp.net/wiki/Morrowind:Umbra_%28person%29
Oblivion: http://www.uesp.net/wiki/Oblivion:Umbra_%28person%29
Yeah it'll most likely be in Skyrim, not sure why everyone likes that sword so much. I always like Chrysamere and the Iceblade of the Monarch.
I think this is the way it will be, zenzi has it right, if it is in the game at all.