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Estate Planning Considerations for Cannabis Professionals

Estate planning

Estate Planning Considerations for Cannabis Professionals

In our practice, we have found that many new cannabis business owners overlook updating their estate plans to account for their new legal cannabis assets. Because of the unique challenges inherent in a state-legal cannabis business, business owners need to take special care when updating or drafting their estate plans to encompass their new legal cannabis assets. This means that in addition to the common estate planning goals most business owners seek to achieve, like avoiding probate, determining a business succession plan, and creating an orderly distribution of assets, there are other important estate-planning concerns that should be taken into consideration.

Perhaps the single most important decision a cannabis business owner must make is what happens to their assets, including their business assets, in the event the owner dies. This is where comprehensive succession and estate planning comes in to play. Succession planning is especially important in the cannabis industry, because Oregon’s cannabis regulations must be adhered to if a cannabis licensee’s corporate structure or ownership structure changes[1]. A cannabis business owner should be mindful of how their business assets will be distributed, make sure their plan follows the OLCC rules, and actively avoid transfers to individuals who would not qualify to become an owner under the OLCC rules. Also, it is at this stage in planning where a conversation should be had concerning probate avoidance measures, like trusts, joint ownership of assets, and beneficiary designations.

Some other important decisions a business owner should make is who to nominate to make decisions for them should they become incapacitated and unable to make decisions for themselves, and who will administer their estate when they die. A well thought out and executed estate plan will minimize any disruption to the business if an owner becomes incapacitated, and provide the business owner the security of knowing their estate will be administered according their wishes. Often, a client will choose a spouse, partner, family member, or close friend to fill these roles. However, sometimes a client chooses a trust company, bank, or other professional organization to administer their estate after they die. These entities are called corporate fiduciaries. If an estate contains cannabis business assets, a corporate fiduciary may be unwilling to serve in that role because cannabis is still a Schedule I drug under the federal Controlled Substances Act. This is why it is vitally important for a cannabis business owner to choose the individual or entity to fill these roles only after careful vetting, and after obtaining that person or entity’s consent.

Finally, it may also be wise for a cannabis business owner to discuss asset protection strategies, given the nature of the work and potential liabilities. First and foremost, all cannabis businesses should have adequate liability insurance as a first layer of defense. It is equally important that all business assets be segregated in limited liability companies or other corporate entities, and that no personal assets be co-mingled with those separate business entities. A gifting plan or the use of irrevocable trusts are a few more ways a business owner can shield their personal assets from third party creditors by moving assets out of the owner’s estate. Last, but certainly not least, are asset protection trusts. Recently, 17 states have enacted laws that allow what are called “domestic asset protection trusts” (DAPTs). Essentially, a DAPT is an irrevocable trust, with distributions controlled by a third-party trustee, in which assets in the trust are shielded from creditors to a certain extent. The unique benefit of a DAPT, as opposed to other irrevocable trusts, is that the individual who creates a DAPT may also be a beneficiary, subject to very strict distribution rules. Of the 17 states which have enacted DAPT statutes, Nevada stands apart, offering the most protection to individuals from creditors and the most favorable distribution rules. There are, however, drawbacks to all DAPTs. First, as stated above, a DAPT is an irrevocable trust, meaning that once assets are placed into the trust, it is very difficult to remove them. Second, there are strict rules that must be followed for an individual to gain the creditor protection of the DAPT, including what assets can be placed into the trust, who is allowed to act as a trustee, or manager, of the trust, and how and when distributions are made from the trust. Third, DAPTs are fairly new estate planning instruments, and the courts are still working through how far a DAPT’s protection from creditors truly extends. Finally, no asset protection trust will shield assets transferred into the trust for the purpose of avoiding existing creditor claims. Even with these drawbacks, it may make sense for a cannabis business owner to explore how a DAPT may benefit their overall estate plan and asset protection strategy.

If you would like to discuss your existing estate plan, or if you need to start an estate plan from scratch, please give us a call and let us help guide you through the process.

[1] OAR 845-025-1160(4)