Definitely rude: requests for "donations in lieu of" are reasonable when someone is asking me to donate to X in lieu of giving them Y. "Instead of sending flowers to the funeral, please donate to this charity" assumes that I want to do something to remember the deceased and/or console the family, and says that in this case, they would be comforted to know that money was going to cancer research, or hospice, or something else relevant.
The difficult grown-up thing to do would be "Dear So-and-so's Parents, I think you misunderstand the nature of donations in lieu of. If you are donating in lieu of sending me a thank-you note, you should send me an individual note asking me to choose a charity." If I or my child was invited to another gift-giving event by that family, the child would get a nice birthday or Christmas card, and during or after the party, the parents would get an email saying "in lieu of troubling you or your child to write a thank you note, I have donated to Charity of My Choice." (Snarky Tea Drinker wants to put that note in the birthday card, but I'm not going to do that to a six-year-old.)