"We believe this decision is in the best interest of our team," Bucks general manager John Hammond said in a statement. "We wish Larry well and remain excited about the future of the Bucks organization."
ESPN's Marc Stein first reported Wednesday that the sides were finalizing an agreement expected to pay out roughly half of the $33 million remaining on Sanders' contract over the next seven years.
Sources told Stein that Sanders -- though eligible to play in the playoffs with another team because he was released before March 1 -- has no current plans to play in the NBA again this season while he works through the "personal issues" that have plagued him.
"It's business. That's just the nature of this. It happens," Bucks coach Jason Kidd said. "We wish Larry the best with moving forward and hopefully everything works out."
Sanders appeared in 27 games for Milwaukee this season, averaging 7.3 points, 6.1 rebounds and 1.4 blocks in 21.7 minutes of action.
Information from The Associated Press was used in this report.