Vaughn, 37, played for the Magic in the 2002-2003 season and won an NBA championship with San Antonio in 2007 and was a Spurs assistant for the last two seasons.
"We quickly saw that Jacque's spirit and leadership strengths made him the clear choice," General Manager Rob Hennigan said in a written statement. "We are confident that his diligence, attention to detail and communication style will help establish the bedrock of our culture moving forward."
Vaughn's leadership will be tested right away as he gets the Magic on track at the same time the future status of star center Dwight Howard remains up in the air. Howard has been the focus of high-profile trade rumors in recent months and has not committed to remaining in Orlando.