From what I have heard is that development for Season 3 was well under way and my guess is that they will do season 3 as a tribute to Monty and end it at the end of the 3rd season
I'm not sure how well that would work. The script for season 3 was doubtless finished months ago; given that, from what I understand, there were meant to be many more seasons, it's highly unlikely that season 3 ends with a satisfying resolution in which little to no major plot threads are left unresolved. It is of course possible that the ending could be rewritten into a series finale, but such changes would invariably feel abrupt and forced.
If the staff at Rooster Teeth feel that prematurely ending the series would be the most appropriate means of honoring Monty, I will of course respect their decision; I did not have the privilege of knowing the man and thus cannot guess what he would have wanted in these tragic circumstances. If, however, they do not feel that RWBY's cancellation is what Monty would have wanted, I feel it would be for the best if the series was continued indefinitely, with the original plan being followed as closely as is now possible. Such a course of action would both prevent the employees hired specifically for the series from losing their jobs and provide a means of continuing Monty's legacy for years to come. Admittedly, my perspective is rather biased, given that I enjoy the series and would of course prefer that it continue.