The Lakers confirmed the appointment on Friday, with the 36-year-old Walton signing a multi-year contract after Bryon Scott was sacked last week.
Walton, who played for the Lakers between 2003 and 2012, will be tasked with rebuilding the Kobe Bryant-less Lakers once his duties as Golden State Warriors assistant conclude at the end of the NBA play-offs.
The Lakers have missed the play-offs for three consecutive seasons, having ended the 2015-16 campaign with a 17-65 record as Bryant farewelled the game.
"We're excited to bring Luke back to Los Angeles, where we feel he's going to start an outstanding coaching career," said Lakers general manager Mitch Kupchak.
"He's one of the brightest young coaching minds in the game and we feel fortunate that he'll be leading the on-court future of our team."
Walton returns to Los Angeles with experience as head coach.
In the absence of Warriors boss Steve Kerr, Walton guided the NBA champions to a 39-4 record, including a 24-0 start - the best start in the league's history.
Walton finished eighth in coach of the year voting this season.