One of my supervisors (also a close friend outside of work) from a job I had 5 years ago recently died. If an employer asks why they can't contact the employer, how do I tell them this without it sounding tacky or tasteless?
"Sadly, she is no longer with us."
Or whatever your most appropriate phrase for death is ("died", "passed away", "moved on", "passed on", etc.). Prefacing it with "sadly", etc. (or using an appropriate tone of voice) would be the main difference between tasteless and not (and also it is presumably honest, given your situation).
Keep in mind that the person you are speaking to probably understands death as well, and so you don't really need to go that far out of your way to communicate it, as long as you are succinct and respectful.
As an aside: You could, if you want, also consider reaching out to a coworker from that old company, if there is one and it's appropriate, and asking if they wouldn't mind being a backup reference. Then if the employer asks, you can explain the death but also provide an alternate option.