No, I don't think the powers that be expected her to die. They knew Nancy Marchand was sick, but expected her to recover.
The third season was supposed to feature a running storyline involving Tony patching things up with Livia so she wouldn't testify against him in the Rico trial.
Unfortunately, Nancy Marchand took a turn for the worse between production for the second and third seasons and died suddenly. David Chase had to rewrite numerous episodes.
While we're on the subject, I really, really wish they hadn't used the "CGI Livia" in the episode "Proshai, Livushka." It looked so horrible and obviously fake.
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