I agree. Though this situation is not that uncommon. (managers leave the company; you leave the company; recommender could be your client or customer; etc). The emial address does not matter so much. However, it may show up on the background check or elsewhere.... and I agree that it is better to preempt it since he/she are no longer your current supervisor.
I would not say they got laid off, but I would mention that the recommender no longer works for the company. Laid off sounds as though the person is not competent/worst performer. I am sure the person will find a job eventually

I think a short brief explanation along the lines of "I feel this person is the best person to evaluate my professional performance and personal character based on our professional experience of 7 years until about 2 weeks ago. I felt that getting a recommendation from my current supervisor who has known me for only a few months would be somewhat superficial."
P.S. You can see if you can get any input from admissions consultants. This may not be an issue at all.