The use of an intelligent magical item. When is it appropriate and how powerful should it be?

Question

This is my first question, so forgive me if I seem to miss some of the protocols. I'm running a D&D 3.5 custom campaign setting, I tend to be a "low magic" and very high rp kind of guy focusing more on narrative and character development than hack and slash play styles, and, I've been a DM for a few years now, I have reasonable experience, but I've basically stuck to my guns (and thus have not experienced a lot of interesting sides to the game), I'm running a campaign with my most regular group now to break molds and try things we've never done before.

They are all either Dwarves or Gnomes (4 or 5 players depending on who shows up on a given week) who are on a massive expeditionary quest to find an ancient dwarven city that has sunk into a place very much like the "Lowerdark" of Forgotten Realms. The group is all level 5 currently and I'm wanting to use an item I've never had a chance to use. An intelligent magical warhammer who calls itself "Kashte'dun" and it was built during a time when the dwarven empire was losing a lot of territory, it has the special purpose of reclaiming lost dwarven territory, it is lawful neutral and as a rule of thumb (but not an actual guideline) it will usually only choose a dwarven wielder, the exception being any character of a race could wield it if for whatever reason they are on a mission that would coincide with reclaiming dwarven ruins as that is the main perrogative of the hammer. That all aside, I have a level 5 dwarf barbarian, ranger (two-weapon currently with urgrosh), bard, and rogue and a gnomish cleric to consider. Being that they are level 5 and 9 times out of 10 this hammer will be used by one person:

What should the hammer be capable of? IE Max Modifier Bonus, What kinds of lesser abilities? any greater abilities? Of course it has a specific purpose and a dedicated ability of some kind. And what should its attributes be? (I believe it should have high wisdom and charisma at the sacrifice of intelligence if need be)

Furthermore, what is a fair way to determine who gets it? I have never dropped such a valuable item to be covetted by an entire group. Should I perhaps find a way that it uses each player to further its goals at some point usually sticking with the preferred host? Should I add in less flashy but just as useful magic weapons and armor to take the edge off for the other players and have the hammer just stick with whoever fits it?

And one last question, I need some kind of subtle "escape hatch" for it. Incase it ends up over-powered, abused, out of place, etc. Some way it can leave without everyone feeling the sting of losing an item like that (perhaps if it's abused it has a failsafe that makes it kind of self-destruct, leaving it devoid of its intelligent properties and just a "+blah warhammer")

Answer 1

Good advice from @Zachiel. To supplement a bit, specifically on the balancing with other -players question:

Since you say you run a more RP focused game, if you pepper the Hammer's powers with some significant annoyances, minor inconcveniences in combat or major ones in non-combat situations, it may soften the jealousy from the other players. Maybe it causes the wielder to eat 3x normal to keep it's power up, causing rations to be a problem and tavern patrons to whisper (loudly) about him behind his back, causing bar fights, etc. Maybe it reduces the effectiveness of items it doesn't consider "worthy" of being associated with it. Or maybe it's just that it's an ancient Dwarven construct and has the brooding, taciturn, grouchy personality of those old Dwarven stereotypes (to the nth degree). Just add enough counterbalances to make the other players occasionally say, "Thank the gods I don't have to deal with that thing." You can do a lot without negatively impacting the user's combat prowess, which is where the Hammer really shines.

Perhaps it even has effects that are detrimental enough that no one can use it for long, and they have to swap it amongst them just to survive it's power.

In addition, if it turns out that the Hammer is too powerful, or narratively wants to leave, you can ramp up those negatives until they are unbearable (which might also explain why anyone would abandon a powerful magical Hammer to begin with...).

Answer 2

You're telling us you're playing in a low magic D&D game, and D&D 3.5 is really hard to play with that premise, based on the fact that from level 6 onwards even unequipped monsters get access to powerful magic or mundane features that require magic to be dealt with (incorporeality and flying come to mind).
While I understand your will to avoid playing in a magicfest wu-xia setting where everyone is packed to the gills with magic trinkets, that's where D&D brings you to and trying to avoid it could give you balancing problems unless you play E6 (a D&D variant where players and NPCs are never more than level 6, except for monsters).

On this basis, the idea of having everyone find a treasure cache where they all can get some new equip is a great idea and I strongly suggest you go for it.

As for the artifact, take a look at the expected wealth of the group and determine which weapon your dwarf should have at his level. Since the intelligent weapon is a temporary aid that's gonna be very specific to a portion of the adventure, you can have it be a little more powerful than his expected weapon - this additional power comes with limitations, of course, being the personality of the intelligent weapon only interested in its own mission, it would automatically cease to dish out its bonuses if kept afterwards or brought out of the mines.

Also, remember to have the dwarf find an appropriate-level weapon in the mines and then engineer some other stories to let shine the other guys in the party too. Especially the mundane types, who are going to need some more magic soon to stay on par with your cleric, effectiveness-wise.

For the intelligent weapon's abilities, aim for a +1 or even a +2 against mission-related monsters, some flavorful abilities that might be useful or essential in the mines (like, to bypass a magic trap you need to cast that unusual spell. Let the bard know or the ranger notice, maybe) but don't give it any ability that's the equivalent of more than a 3rd level spell.