Estate Planning for the Cannabis Business Owner
With the 2020 election results seeing four more states legalize cannabis for adult recreational use, the business opportunities for cannabis entrepreneurs continue to grow. Due to the unique nature of cannabis being illegal federally but legal on the state level, the smart cannabis entrepreneur understands the importance of a comprehensive business plan that accounts for unforeseen issues with the business. The even smarter cannabis entrepreneur will also have consulted an estate planner to help create a succession plan accounting for unforeseen personal issues that could just as easily destroy the business.
In creating such a succession plan it's important to work with someone who knows the laws of your state. Because the federal government still considers cannabis illegal for all uses, yet has not prohibited legalization at the state level, cannabis laws differ by state. For instance, every state requires a business owner to have a license to operate a cannabis business, but the rules around how, or even whether it's possible to transfer that license vary. Washington explicitly outlines a process for transferring a licensed cannabis business due to death, incapacity, or other unforeseen problems. However, the legalization bill currently being considered by the House of Representatives here in Minnesota stipulates that licenses are not transferrable. A cannabis business owner that fails to create a succession plan specific to their state could doom the business to a fatal delay of operations, affecting the livelihoods of everyone who interacts with the business.
The most crucial part of a succession plan is picking the right successor to the business. Not everyone can own a cannabis-related business, however. People commonly create their first estate plan in order to provide for their minor children. Yet minors cannot own a cannabis business, and the proposed Minnesota law requires that an owner be at least 21 years old. One solution, conforming to a common estate planning practice, is to place the business intrust for the benefit of the child(ren), with an adult trustee in charge. However, to date no court or licensing board has been confronted with this issue, and some worry that it may cause licensing headaches at best, or be illegal at worst. That uncertainty may not be worth the risk. Cannabis laws also typically prohibit out-of-state residents from owning a license, complicating succession plans if an owner wants to pass the business along to a friend or family member who lives in another state. Many of these issues can be avoided, but it takes active and advanced planning to ensure a smooth transition.
Additionally, not everyone will want to own a cannabis business. While it may seem like a sensible idea to some, others may look at the hazy legal status nationally, on top of the usual set of risks every business owner faces, and decide it isn’t for them. Even a fiduciary unilaterally appointed by will or trust to oversee the estate’s assets may actually put themselves in legal jeopardy by accepting the responsibility. State law governs most estate plans, but if the estate implicates federal law – such as through a bankruptcy proceeding, patents, or the federal estate tax – not only might the fiduciary not be able to claim the implicated asset(s), they maybe charged with violating federal law for trying. Further, the Uniform Prudent Investor Act, enacted in most states, requires fiduciaries to invest the estate's assets as would a prudent investor. The fiduciary may decide it's in the estate's best interest to invest in something less risky, especially if they are charged with managing a minor's inheritance.
There are also tax considerations. The Internal Revenue Code prohibits taking tax deductions and credits for businesses that traffic "in controlled substances." Thus, cannabis businesses cannot take tax deductions on normal business expenses like salaries, rent, and supplies like can other, non-cannabis businesses. At the same time the IRS has determined that even illegal property has a value for taxation purposes, so an estate may end up paying a hefty tax bill depending on the financials of the business.
Finally, a cannabis business owner must consider their life insurance. In some instances, life insurance companies have been known to deny a payout if they discover undisclosed cannabis use by the insured person. The justification often hinges on the insurance company claiming deception by someone who smoked cannabis but had claimed the non-smoker rate on their insurance. Not all cannabis business owners use cannabis themselves, but as someone working in the cannabis industry, it may be worth confirming your coverage with your insurance provider.
Owning a cannabis business can be an exciting and lucrative endeavor, but one that must be handled carefully. With all the effort and planning it takes just to open the business, it's worth taking the extra step to consider and craft a succession plan for its continued operation and success.