How to tell my daughter he passed away?

I think she is really too young for you to tell her the truth as she will not understand it and it might scare her. Definitely do NOT take her to the funeral. If you are religious then maybe you can tell her he has gone to be with God. Two years old is far too young to learn about death. And you are right, she will forget in time. You should find a picture of the two of them and frame it and give it to her when she is older and can appreciate how much love they shared. Sorry for your loss.