Dude, I Inherited a Pot Farm, Man! (considerations for Marijuana-related Businesses for T&e Lawyers)

• Publication year: 2020
• Author: By Stacie P. Nelson, Esq., Robert Barton, Esq., and Vivian M. Rivera, Esq.

DUDE, I INHERITED A POT FARM, MAN! (CONSIDERATIONS FOR MARIJUANA-RELATED BUSINESSES FOR T&E LAWYERS)

By Stacie P. Nelson, Esq.,^* Robert Barton, Esq.,^* and Vivian M. Rivera, Esq.^*

MCLE Article

I. INTRODUCTION

Seemingly overnight, marijuana has gone from being fully engrained in society's counterculture to barreling toward complete mainstream acceptance. With partial or outright legalization now in 33 states,¹ the business of marijuana has quickly transitioned from shady outfits to sophisticated enterprises, many of them quite profitable.

As new marijuana-related businesses continue to sprout and existing businesses grow, the wealth transfer aspect of the industry has slowly started to follow. Inevitably, marijuana-related businesses will increasingly become a part of the workload for California trust and estate lawyers. But, despite a trend toward legalization of marijuana at the state level, the ownership of marijuana related businesses as trust or estate assets continues to pose unique challenges and legal risks in large part due to marijuana's still-illegal status at the federal level and its heavily-regulated status in California.

So, what is a fiduciary to do when faced with the prospect of a dispensary or grow farm as a trust or estate asset? What risks does the trust or estate face when owning a commercial building that leases to a dispensary tenant? What is a fiduciary to do with personal property that includes of a personal stash of marijuana? This new world is fraught with significant risk.

This article examines the relevant federal and California laws regulating marijuana-related businesses, identifies the procedure for transferring a decedent's interest in a marijuana-related business to a personal representative, and identifies some of the common risks a marijuana-related business will pose to a personal representative, trustee, or other successor in interest.

II. BACKGROUND A. Federal Law

The federal Controlled Substances Act (CSA) classifies marijuana (or "marihuana") as a Schedule I drug²—the most restrictive designation reserved for drugs with a "high potential for abuse," "no currently accepted medical use in treatment," and a "lack of accepted safety."³ Accordingly, the CSA prohibits the cultivation, distribution, and possession of marijuana for any reason other than to engage in federally-approved research.⁴

Marijuana is defined in the CSA as "all parts of the plant Cannabis sativa L., whether growing or not; the seeds thereof; the resin extracted from any part of such plant; and every compound, manufacture, salt, derivative, mixture, or preparation of such plant, its seeds or resin."⁵ As the definition indicates, marijuana includes its compounds and derivatives, as well as synthetic versions thereof. Therefore, Cannabidiol (CBD) Oil is classified in Schedule I of the CSA by operation of this definition.⁶

The definition of marijuana in the CSA expressly excludes "the mature stalks of such plant, fiber produced from such stalks, oil or cake made from the seeds of such plant, any other compound, manufacture, salt, derivative, mixture, or preparation of such mature stalks (except the resin extracted therefrom), fiber, oil, or cake, or the sterilized seed of such plant which is incapable of germination."⁷ In addition, the Agriculture Improvement Act of 2018 (the "2018 Farm Bill") removed "hemp"—cannabis with less than 0.3% tetrahydrocannabinol (THC)—from the definition of marijuana under the CSA.⁸ Thus, "hemp," as so defined, is no longer a controlled substance under federal law.⁹

B. California Law

In 1996, California became the first state to legalize medical marijuana with the passage of Proposition 215.¹⁰ In 2015, the California Legislature enacted the Medical Cannabis Regulation and Safety Act (MCRSA), a licensing and regulatory system for medical marijuana businesses, which took effect in 2016.¹¹

In 2016, California passed Proposition 64, known as the Control, Regulate and Tax Adult Use of Marijuana Act (AUMA), which paved the way for the implementation of a system to regulate, tax, and treat recreational marijuana by adults over age 21 similar to the system for alcohol.¹² Recreational use of marijuana became legal in California on January 1, 2018.¹³

[Page 6]

On June 27, 2017, then-Governor Jerry Brown approved Senate Bill 94, entitled the Medical and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA).¹⁴ MAUCRSA consolidated the MCRSA and AUMA, creating a single regulatory scheme that preserves separate license distinctions for medical and adult use businesses and removes many of the barriers that existed under MCRSA and AUMA.¹⁵

III. ADMINISTRATION OF MARIJUANA-BASED ASSETS IN DECEDENT'S ESTATE OR TRUST

In light of the conflict between federal marijuana law and California's rapidly evolving legal landscape, trust and estate attorneys must understand and identify the risks associated with the administration and distribution of marijuana-related assets in California.

A. Transfer of Licenses for Marijuana-Related Businesses at Death of Owner

On January 16, 2019, the California Office of Administrative Law (OAL) officially approved three sets of state regulations for cannabis-related businesses across the supply chain.¹⁶ These regulations, which took effect immediately, provide licensing and enforcement criteria and dictate what happens to a cannabis-related business if it becomes an asset administered by a trustee or personal representative of an estate in California.¹⁷ As detailed below, assets are divided into the following categories: (1) retailers and distributors; (2) manufacturers; and (3) cultivators.

1. Retailers and Distributors - Bureau of Cannabis Control

The Bureau of Cannabis Control (the "Bureau") is the lead agency in regulating commercial cannabis licenses in California and is responsible for licensing retailers, distributors, testing laboratories, microbusinesses, and temporary cannabis events.¹⁸

Section 5024 of the California Code of Regulations (the "Code") provides that "[i]n the event of the death, incapacity, receivership, assignment for the benefit of creditors or other event rendering one or more owners incapable of performing the duties associated with the license, the owner or owners' successor in interest (e.g., appointed guardian, executor, administrator, receiver, trustee, or assignee) shall notify the Bureau ... in writing, within 14 calendar days, by submitting the Notification and Request Form, BCC-LIC-027."¹⁹

In order to continue operations or cancel the existing license, the successor in interest must submit to the Bureau the following:

1. The name of the successor in interest;
2. The name of the owner(s) for which the successor in interest is succeeding and the license number;
3. The phone number, mailing address, and email address of the successor in interest; and
4. Documentation demonstrating that the owner(s) is incapable of performing the duties associated with the license such as a death certificate or a court order, and documentation demonstrating that the person making the request is the owner or owners' successor in interest such as a court order appointing guardianship, receivership, or a will or trust agreement.²⁰

If the Bureau gives the successor in interest written approval to continue operations on the licensed business, the successor in interest is held subject to all terms and conditions under which a state cannabis license is held pursuant to the MAUCRSA.²¹ Thus, approval does not create a vested right to the issuance of a state cannabis license.²²

In the application required to retain the annual license, the individual(s) in charge of controlling the estate or trust must designate themselves as owners, and as such, use their personal information in the annual license application.²³ Other requirements include a $5,000 surety bond,²⁴ proof of compliance with the California Environmental Quality Act (CEQA),²⁵ and if the license is approved, license fees and lab testing fees, based on annual gross revenue.²⁶

If the fiduciary does not want to maintain the business's annual cannabis license, current regulations allow the fiduciary to either cancel the license immediately or ask the Bureau to temporarily extend the license to allow enough time to sell or destroy remaining cannabis products before cancelling the license.²⁷

2. Manufacturers - Department of Health

The California Department of Public Health's Manufactured Cannabis Safety Branch (MCSB) regulates all commercial cannabis manufacturers in the state.²⁸ The regulations governing the transfer of ownership of a license after the death, incapacity, or insolvency of a manufacturing licensee are very similar to the rules governing retailers/distributers, although the successor in interest is limited to only 10 days to notify the Department of Health Services of the change of ownership.²⁹

[Page 7]

3. Cultivation - Department of Food and Agriculture

Lastly, the CalCannabis Cultivation Licensing, a division of the California Department of Food and Agriculture, regulates commercial cannabis cultivators in California.³⁰ The regulations governing the timeline and requirements to transfer of ownership of a cultivation license after the death, incapacity, or insolvency of a cultivation licensee are identical to the rules governing manufacturers—i.e., the successor in interest has only 10 days to notify the Department of Food and Agriculture.³¹

Given the extremely short timeframe (10-14 calendar days) to transition a marijuana-related license between deceased owners and their successors, California estate planning attorneys need to advise their clients accordingly and ensure that viable succession plans are in place for marijuana-related businesses. Special planning is further required to ensure that named fiduciaries and/or beneficiaries of marijuana-related assets are eligible under California's regulatory scheme to receive or transfer ownership of such assets.

B. Leasing to a Marijuana Business

While lessors of real property are not...