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If he personally knows either the deceased or the hiring manager, I'd acknowledge the loss. Otherwise I don't think I would. I could see that seeming like he's an ambulance chaser.
In this economy, I don't think he should wait for "the appropriate time," but he needs to be extra super careful that his cover letter and any personal references (friend on the inside) are polite and to the point. "so, I hear the guy croaked. Can I have his job?" is probably not the way to get that position. But I'm sure you know that. I like DBB's take on this. Since he heard of a job that isn't yet posted, it must be from someone on the inside. I think the best approach is to have that person go to bat for him. Best of luck!
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"Traveling - It leaves you speechless, then turns you into a storyteller. ~ Ibn Battuta
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