The Dutchman's future has been in question for some time at San Siro, and the club has decided to part ways with him and bring in the former striker as his replacement.
Seedorf was appointed head coach of the Italian giant in January, replacing Massimiliano Allegri at San Siro.
Despite coming close to securing one of Serie A's Europa League spots, the 38-year-old was expected to be relieved of his duties after coming under criticism from president Silvio Berlusconi and chief executive Adriano Galliani.
On Monday the club confirmed that it has parted ways with the former midfielder, who ended his playing days at Botafogo in Brazil in order to take up the role.
Milan won 11 of his 19 league games in charge — twice as many as his predecessor had managed prior to Seedorf's arrival. He lasted less than six months in the Milan dugout.
Inzaghi, 40, has been named as the new first-team coach after a successful spell at the helm of the Under-19 team.
Via a statement on their official website, Milan revealed that the former striker and club legend has been handed a two-year deal.
AC Milan "have sacked coach Clarence Seedorf and have entrusted the first team, through June 30, 2016, to Filippo Inzaghi," the statement read.
Inzaghi won two league championships and two Champions League titles as a Milan player from 2001 to 2012, scoring 126 in 300 games. He earned 57 caps for Italy, winning the World Cup in 2006. He has no previous experience as a first-team coach.