When your inventory is full, get out an empty bucket (in your full inventory). Then pick up water with the empty bucket and it will disappear, and you will no longer have it.
What I expected to happen was when I collected water with the empty bucket it should've stayed in my hand and I should've been able to use it right after I filled it up other than go into my inventory and look for it. NOTE: When you collect water with the buckets the bucket will disappear from you hand and take the first available spot in you inventory. (That is why it disappears when your inventory is full because it has no where to go.
1. Get an empty bucket in a full inventory.
2. fill the bucket with water and then it will disappear.