When Cannabis and Estate Planning Intersect: Make Sure Your Client’S Plan Doesn’T Go up in Smoke

Reproduced with permission from Daily Tax Report, 58 DTR 11, 3/27/19. Copyright ஽ 2019 by The Bureau of Na- tional Affairs, Inc. (800-372-1033) http://www.bna.com

INSIGHT: When Cannabis and Estate Planning Intersect: Make Sure Your Client’s Plan Doesn’t Go Up in Smoke

BY WENDY S. GOFFE,ESQ. is not a straight line. The following is a description of the major points on that path. For the brave, yet cau- Since 1970, cannabis is considered a Schedule I sub- tious, this is a general overview of the federal and state stance under the federal Controlled Substances Act legal landscape and discussion of the estate planning, (CSA)—along with heroin, LSD, and cocaine. Unau- tax, and ethical considerations for attorneys giving ad- thorized cultivation, distribution, or possession of can- vice where cannabis is part of an estate plan or probate. nabis and knowingly or intentionally manufacturing, distributing, or dispensing it are federal crimes, unless used for federally approved research. CANNABIS IN THE ESTATE PLAN Nevertheless, as of January 2019, nearly two-thirds of the states, Guam, Puerto Rico, and the District of Co- It is likely that estate planners increasingly will find lumbia permit the legal use of cannabis for medical rea- themselves in the position of advising clients with sons, and 10 states for recreational purposes. Retail cannabis-related assets. For those clients owning can- sales are permitted in Alaska, California, Colorado, nabis related businesses lawyers will need to be able to Massachusetts, Michigan, Nevada, Oregon, Vermont, provide advice on how to handle the potentially tremen- and Washington, with Maine set to begin retail sales in dous revenue in light of federal banking, money laun- the summer of 2019. Washington, D.C. permits recre- dering, and other regulations. ational use, but not on federal property, which signifi- Before accepting a client with cannabis or a cannabis cantly limits availability. (Consumption on all federal related business a lawyer should consider their intake land and some Indian reservations is illegal.) Although procedure. There are two general categories of poten- Washington D.C.’s laws do not allow the retail purchase tial clients in the cannabis arena: (1) those that have di- of marijuana in a traditional buyer-seller exchange, rect contact with cannabis because they manufacture, they allow the purchase of another item, good, or distribute, or sell marijuana in compliance with state service—and then receive a free marijuana product that law, and (2) third parties that assist or advise on canna- is ‘‘gifted’’ or donated by the vendor, instead. Gifted bis topics and refer clients to the businesses with direct items may include stickers, shirts, cups, and other trin- contact. These include doctors, bankers, investors, law- kets. yers, landlords, real estate brokers, accountants, and Only four states prohibit all use of cannabis in all ancillary service providers. The first category carries forms: South Dakota, Nebraska, Kansas, and Idaho. more risk. According to studies by Arcview Market Research, le- The lawyer may want to consider a questionnaire gal cannabis is among the fastest-growing markets in and/or a criminal background check to be certain that the United States. Arcview estimates that $11 billion in the potential client is legally permitted to engage in consumer worth of legal cannabis was sold in 2018, and such business activities. It would also be prudent, in the more than $23 billion will be sold by 2022. attorney’s engagement letter, to disclose to the poten- The path to how some states have navigated these pu- tial client that because cannabis is illegal under federal nitive statutes and passed legislation allowing the medi- law, if the federal law were to enforce the CSA against cal and even the recreational use and sale of marijuana activities otherwise lawful under state law, the terms of

COPYRIGHT ஽ 2019 BY THE BUREAU OF NATIONAL AFFAIRS, INC. ISSN 0092-6884 2 representation would have to be revisited and represen- dent fiduciary to carry out those duties the appointing tation may have to be terminated. The attorney should fiduciary may not. The following is a provision identify- consider advising the client that if he or she engages in ing only a partial list of tasks for an independent violations of applicable state law, or in a manner that trustee: would be cause for federal prosecution, the lawyer may ‘‘Independent Trustee—Special Powers. In addition withdraw from representation. And a client should also to all other powers as trustee, an independent trustee understand the limitations on confidentiality if the law- shall have the following powers and authority: (i) to yer’s services are enlisted to plan or commit a crime. amend the trust as the independent trustee deems nec- At the document drafting stage, testators and grant- essary to carry out my intent in establishing the trust or ors often wish to limit gifts based on certain conditions, to otherwise allow the trust to be administered in a one of which is often the use of illegal drugs. Drafters more administrative or tax efficient manner given cur- will now need to carefully specify when the restriction rent or future federal or state laws; provided that any applies, what law applies (if state law, then which one, amendment may not affect the beneficial enjoyment of or federal law), and whether cannabis is included as an the trust estate; (ii) in general, to avail the trust and illegal drug. One option would be to refer instead to beneficiaries of opportunities under existing and future abuse of ‘‘mind-altering drugs, whether legal or illegal.’’ laws that may require extraordinary action such as, but The following is an example of a clause making distri- not limited to: division of trusts into separate shares, butions conditional on drug use: creation of new trusts for the purposes of holding spe- ‘‘Suspension of Distributions. If the trustee at any cific property or interests, and limiting distributions time suspects that a beneficiary is using any substance from a new trust to an ascertainable standard or to per- (including, without limitation, drugs, chemicals, or al- missible recipients; and (iii) to deal with any regulated cohol) in an abusive manner or is engaging in any abu- assets that a fiduciary is not able to administer because sive addictive behavior, the trustee is authorized to re- of state law or other circumstances, which prevent such quest that the beneficiary submit to one or more exami- fiduciary from administering such assets. All actions nations determined to be appropriate by a licensed and taken by an independent trustee hereunder should be practicing physician, psychiatrist, or other appropriate consistent with, though not necessarily in literal compli- health care professional selected by the trustee. The ance with, the dispositive scheme of the trust. An inde- trustee may request the beneficiary to consent to full pendent trustee shall be under no duty to exercise any disclosure by the examining doctor or facility to the power granted under this section and shall be held trustee of the results of all such examinations, and the harmless and indemnified against any liability, claim, trustee may totally or partially suspend or withhold all judgment, expense, or cost arising from or attributable distributions until the beneficiary consents to one or to his or her exercise or failure to exercise any power more examinations and disclosure to the trustee, and granted under this section, except as provided in those examinations indicate no such use or behavior.’’ [section re trustee standard of care].’’ Where a beneficiary of a marijuana-related asset may be a minor, it is important to contemplate how that ben- How cannabis and cannabis related businesses are to eficiary may benefit from inherited assets without run- be handled in an estate is an area with more questions ning afoul of the many laws preventing minors from than answers. When an estate or a trust includes a re- possessing or owning any such assets, either outright or tail, processor, or producer cannabis license, a named in trust. While the laws in each state will differ and the fiduciary first must determine whether he, she, or it is following has not yet been tested, perhaps the following able to serve and if so, is the fiduciary willing to serve. limitation may allow a trustee to hold such an asset dur- While an individual may comfortably rely on the en- ing the minority of a beneficiary (if not longer): forcement priorities outlined in Cole II (discussed be- ‘‘Distribution of Cannabis Assets. Any beneficiary low), it is likely that a named corporate fiduciary will who has not reached the age of majority at the time of decline its appointment. In addition, given the FinCEN my death may not receive outright any cannabis-related guidance, also discussed below, a fiduciary should con- assets, licenses, permits, interest in entities, or other re- sider whether a financial institution will even work with lated property (‘‘cannabis assets’’). Instead, he or she a trust or an estate that includes property related to or may receive financial benefits, in the sole discretion of derived from the production or sale of cannabis. my trustee, from cannabis assets, which may include a Oregon has contemplated, to a limited extent, what legally operated cannabis-related business so long as happens to cannabis in a decedent’s estate. Or. Rev. the trustee manages the funds generated by such assets Stat. 475B.033(1) and (2) provide: ‘‘The Oregon Liquor until said beneficiary reaches the age of majority. Once Control Commission may, by rule or order, provide for such beneficiary reaches the age of majority, he or she the manner and conditions under which: (1) Marijuana must obtain the appropriate licenses and permits and items left by a deceased, insolvent or bankrupt person comply with all applicable regulations to qualify to le- or licensee, or subject to a security interest, may be gally own the cannabis assets outright and free of foreclosed, sold under execution or otherwise trust.’’ disposed[; and] (2) The business of a deceased, insol- When a cannabis business is owned by two or more vent or bankrupt licensee may be operated for a reason- unrelated entities, the owners should investigate cross- able period following the death, insolvency or bank- purchase plans, buy-sell agreements, or entity purchase ruptcy.’’ plans. Through careful planning, individuals may be Unlike Washington, discussed below, Oregon does able to avoid some of the more difficult issues related to not provide a clear procedure for continuation of a de- the transfer of cannabis licenses. cedent’s business. Presumably, like Washington, any A testamentary instrument transferring an interest in beneficiary and/or operator of a cannabis business cannabis (or any other highly regulated asset) should would need to independently qualify to hold any appli- consider allowing the fiduciary to appoint an indepen- cable licenses and permits.

After death and once it is established that a testamen- FEDERAL LAW tary instrument may legally transfer ownership, the next step will be to determine whether the beneficiary may take ownership. The laws governing the transfer of The Ogden Memo assets by a decedent are those of the decedent’s domi- When states began legalizing marijuana, the Depart- cile prior to death. But the law of the beneficiary’s do- ment of Justice (DOJ) made it clear that it intended to micile will apply to determine whether or not he or she pursue any commercial enterprise selling or producing may take possession. cannabis. On Oct. 19, 2009, Deputy Attorney General Successful cannabis entrepreneurs need to keep in David W. Ogden (under Attorney General Eric Holder) mind that even illegal property has a value. The IRS has issued a memorandum known as the ‘‘Ogden Memo’’ held that the fact that a market is illicit does not obviate confirming that the DOJ remained ‘‘committed to the the existence of that market for estate tax valuation enforcement of the [CSA] in all States.’’ However, given purposes. (Browning v. Commissioner.) the DOJ’s limited ‘‘investigative and prosecutorial re- Each state’s procedures to transfer ownership of a li- sources,’’ the Ogden Memo advised U.S. Attorneys to cense are different, but the goal is the same: to ensure focus on prosecuting ‘‘significant marijuana traffick- that the transferee is qualified to hold a license. For es- ers’’ and not on those whose actions are in ‘‘clear and tate planners, understanding these rules is critical to unambiguous compliance with existing state laws pro- ensure that a license holder has a viable business suc- viding for the medical use of marijuana.’’ cession plan in place. At the death of a client, the laws governing the transfer of assets by a decedent are those Cole Memoranda of the decedent’s domicile prior to death. But the law of the beneficiary’s domicile will apply to determine Ogden’s successor, DOJ Deputy Attorney General whether or not he or she may take possession. James Cole, issued a memorandum (Cole I) expressing How a cannabis-related asset will be delivered to a the DOJ’s position that the Ogden Memo was never in- beneficiary by a fiduciary needs to be carefully consid- tended to shield from federal enforcement action and ered. As a Schedule I drug, using the U.S. Postal Ser- prosecution marijuana-related cultivation and distribu- vice is a federal crime, punishable by monetary fines tion for medical use or lower-level marijuana-related and imprisonment. So, the traditional delivery by mail crimes already being prosecuted by state laws. A subse- of an asset to a beneficiary is yet another challenge for quent memo issued in August 2013, known as ‘‘Cole II’’ the fiduciary. (18 U.S.C. Section 1716.) expanded on Cole I. It emphasizes that the federal government will not pursue legal challenges in jurisdictions Where a business is an asset of the estate, whether that authorize marijuana use, assuming those state and the new applicant is the fiduciary or the beneficiary (if local governments maintain strict regulatory and en- that can even be established immediately following the forcement controls on marijuana cultivation, distribu- death of a license holder), a new license may need to be tion, sale, and possession that limit the risks to ‘‘public applied for and issued before the fiduciary or the ben- safety, public health, and other law enforcement inter- eficiary can legally stand in the shoes of the decedent. ests.’’ In light of these strict rules, it may be a good practice to But Cole II instructs federal prosecutors to prioritize put in place a well-thought-out business succession their ‘‘limited investigative and prosecutorial resources plan. to address the most significant [cannabis-related] If a fiduciary agrees to serve and is qualified to do so, threats.’’ Those threats include: (1) distribution to chil- he or she must then determine whether the estate, any dren; (2) use of revenue to further other criminal enter- trusts, and individually named beneficiaries are eligible prises; (3) diverting cannabis from states that have le- to own licenses under applicable state laws. Both Wash- galized its possession to states that prohibit it; (4) using ington and Oregon impose age, residency, and criminal authorized cannabis activity as a pretext for the traf- history requirements on license ownership. (Rev. Code ficking of other illegal drugs; (5) using firearms or vio- of Wash. Section 69.50.331; Ore. Admin. Rule No. 845- lent behavior in the cultivation and distribution of can- 025-1115.) It is unclear how those requirements will be nabis; (6) exacerbating public health and safety risks interpreted if a trust or an estate becomes the owner of due to cannabis use, including driving while under the a license. The fiduciary will need to work with the state influence of cannabis; (7) growing cannabis on public or local licensing authority to determine whether a trust land; and (8) possessing or using cannabis on federal or an estate is eligible for a license. property. TREASURY DEPARTMENT GUIDANCE Federal Income and Estate Tax In addition to the guidance issued by the DOJ, the Fi- Considerations nancial Crimes Enforcement Network (FinCEN), a division of the Treasury Department, issued its own guid- Few cannabis business deductions are allowed on ance in 2014 to clarify Bank Secrecy Act expectations federal tax returns, and the gross revenue is taxable. In for financial institutions seeking to provide services to some instances, the cost of goods sold (costs incurred cannabis-related businesses in light of state initiatives for the purchase, conversion, materials, labor, and allo- to legalize certain cannabis-related activity. The guid- cated overhead incurred in bringing the marijuana in- ance, while intended to help the industry, requires ex- ventories to their present location and condition) may pensive and onerous paperwork from financial institu- be deductible under I.R.C. Section 280E, but the ordi- tions about such customers under its anti-money- nary and necessary expenses related to sale are not. laundering regulations.

The FinCEN guidance points out that the decision to cal cannabis. MCRSA provided for the sale of retail open, close, or refuse any particular account or relation- medical marijuana beginning in 2018. ship should be made by each financial institution based Recreational Use and Retail Sale of Marijuana. In on a number of factors specific to that institution. These 2016, California passed Proposition 64, known as the factors may include its particular business objectives, Control, Regulate and Tax Adult Use of Marijuana Act an evaluation of the risks associated with offering a par- (AUMA). AUMA paved the way for the implementation ticular product or service, and its capacity to manage of a system to regulate, tax, and treat recreational mari- those risks effectively. In addition, under the FinCEN juana by adults over age 21 similar to the system for al- guidance, a financial institution that decides to provide cohol. Retail recreational marijuana became available financial services to a cannabis-related business would beginning Jan. 1, 2018. And adults may possess, gift, be required to file a Suspicious Activity Report if the fi- cultivate, and transport limited amounts within the nancial institution knows, suspects, or has reason to state. suspect that a transaction involves funds derived from a Commercial Licenses. On June 27, 2017, Governor cannabis-related business. Jerry Brown approved Senate Bill 94, entitled the Medi- cal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA). This legislation joined the medical and STATE LAW recreational systems. By doing so, the more industry- friendly rules of the recreational sector, such as allow- In spite of the many federal roadblocks, the sale and ing applicants to obtain licenses in different phases of use of recreational cannabis first became legal after vot- the industry—cultivation, manufacture, distribution, ers approved an amendment to the Colorado Constitu- and retailing—could apply to the medical sector. It tion in the November 2012 elections. Many states had eliminated the restriction on vertical integration. legalized small amounts of medical cannabis before Enforcement. Marijuana may not be smoked where 2012, starting with California in 1996, and many have tobacco is prohibited (except within a private resi- legalized both recreational and medical use since then. dence). And employers may continue to prohibit mari- While each state’s laws differ, generally they limit pos- juana use by their employees, whether medical or rec- session, use, and ownership of retail licenses based on reational. age, residency, and criminal history. The following is a Taxes. Beginning Jan. 1, 2018, California imposed summary of the laws currently in effect in California two new taxes on cannabis, both an excise tax on pur- and Washington, where both medical and recreational chasers and a tax on the cultivation of cannabis that en- marijuana are legal. ters the commercial market.

California Washington Medical Marijuana. California adopted Proposition Medical Marijuana. On Nov. 3, 1998, Washington 215, the Compassionate Use Act of 1996 (CUA), which voters approved Ballot Initiative 692, making small provided that seriously ill Californians had the right to amounts of cannabis legal for medical purposes. The obtain and use marijuana for medical purposes. (Cal. Washington Supreme Court ruled in 2010 that ‘‘I 692 Health & Safety Code (Calif. HSC) Section 11362.5) did not legalize marijuana, but rather provided an au- With the passage of the CUA, patients and primary thorized user with an affirmative defense if the user caregivers did not risk criminal prosecution (under shows compliance with the requirements for medical California law) for obtaining and using marijuana upon marijuana possession.’’ the approval of a California-licensed physician. (Calif. In 2015, SB 5052 brought medical cannabis under the HSC Section 11362.5(d).) system and rules of I-502 (discussed below). In 2017, California’s medical marijuana law was expanded by the Washington legislature closed a gap in the law SB 420, the Medical Marijuana Protection Act (MMPA), caused by the merger of the two systems. Medical can- on Jan. 1, 2004. (Calif. HSC Sections 11362.7- nabis patients could grow cannabis for personal use, 11362.7.83.) Among other things, the MMPA defined but had no legal pathway to acquire plants. Engrossed who is a qualified patient, primary caregiver, or attend- Substitute SB 5131 (ESSB 5131) effective July 23, 2017, ing physician, and what constitutes a serious medical allows qualifying patients and their designated caregiv- condition for which marijuana may be used. (Calif. HSC ers to purchase plants and cultivate plants for personal Section 11362.7.) It also authorized patient organized use, and join state-registered medical cannabis coop- ‘‘cooperatives’’ or ‘‘collectives’’ to grow, distribute, eratives to grow cannabis with up to four other patients. and/or sell medical marijuana on a nonprofit basis to Those who hold a recognition card issued by the state their members. It allows designated primary caregivers are able to grow and purchase larger quantities. to charge for their labor and services in providing mari- Recreational Use and Retail Sale of Marijuana. In juana. (Calif. HSC Section 11362.71.) 2012, Washington voters approved Ballot Initiative 502 In 2015 California’s legislature enacted a licensing (I-502), an initiative amending state law to provide that and regulatory system for medical marijuana busi- the possession of small amounts of cannabis by indi- nesses, the Medical Cannabis Regulation and Safety Act viduals over the age of 21 is not a violation of Washing- (MCRSA), which took effect Jan. 1, 2016. It established ton law. In addition, the initiative provided that the permitting for marijuana cultivation and dispensaries. ‘‘possession, delivery, distribution, and sale’’ by a val- Under MCRSA, qualified patients can cultivate up to idly licensed producer, processor, or retailer, in accor- 100 square feet for personal medical use, and primary dance with the regulatory scheme administered by the caregivers with five or fewer patients are allowed up to Washington State Liquor and Cannabis Board 500 square feet. As under SB 420, local governments (WSLCB), are not criminal or civil offenses under may further restrict or even ban the cultivation of medi- Washington State law. Nevertheless, an employer is un-

COPYRIGHT ஽ 2019 BY THE BUREAU OF NATIONAL AFFAIRS, INC. 5 der no obligation to accommodate the medical use of faith effort to determine the validity, scope, meaning or cannabis by an employee. application of the law.’’ Enforcement. I-502 legalized marijuana use for Several state bar associations have issued guidance adults; however, there are still a number of restrictions, as to whether an attorney may assist clients with com- the violation of which may be subject to strict penalties: plying with state medical and recreational cannabis laws that conflict with the CSA. Most states that have s Possession of marijuana in amounts above speci- considered the issue have concluded that the attorney fied legal limits remains criminal. Growing or selling does not run afoul of state ethical rules. But, many of marijuana without a license from the state remains the opinions are limited to medical and not recreational criminal, except for qualifying patients or designated marijuana. providers who grow or possess marijuana in accor- For example, the Illinois Rules of Professional Con- dance with the applicable provisions of Rev. Code of duct permit lawyers to counsel clients on activities per- Wash. Chapter 69.51A. mitted in Illinois that may violate federal law, so long as s Public consumption is illegal. the lawyer counsels the client on the potential conse- s Rev. Code of Wash. Section 46.61.502 provides a quences: standard for driving under the influence of marijuana. ‘‘A lawyer shall not counsel a client to engage, or as- Laws similar to those applicable to driving under the in- sist a client, in conduct that the lawyer knows is crimi- fluence of alcohol apply. nal or fraudulent, but a lawyer may Commercial Licenses. I-502 established a three-tier (1) discuss the legal consequences of any proposed production, processing, and retail licensing system that course of conduct with a client, permits the state to retain regulatory control over the (2) counsel or assist a client to make a good-faith ef- commercial life cycle of cannabis. As with alcohol after fort to determine the validity, scope, meaning or appli- Prohibition, those in the cannabis industry are barred cation of the law, and from complete vertical integration. (3) counsel or assist a client in conduct expressly per- The WSLCB adopted detailed rules for implementing mitted by Illinois law that may violate or conflict with the initiative, including cannabis license qualifications federal or other law, as long as the lawyer advises the and an application process, application fees, cannabis client about that federal or other law and its potential packaging and labeling restrictions, recordkeeping and consequences.’’ (Ill. Rules of Professional Conduct security requirements for cannabis facilities, reason- 1.2(d)(3). able time, place, and manner advertising restrictions, New York has only opined on the ethics concerning and taxation. medical marijuana-related advice. New York’s State Washington also strictly governs the operation of a Bar issued an ethics opinion concluding: business of a deceased or incapacitated license holder ‘‘As Rule 1.2(d) makes clear, although a lawyer may by requiring the executor, administrator or trustee to not encourage a client to violate the law or assist a cli- qualify as a licensee under the laws that apply to any ent in doing so, a lawyer may advise a client about the other applicant. (Wash. Admin. Code 314-55-140.) reach of the law.....Thus, a lawyer may give advice Taxes. The recreational use of cannabis is regulated about whether undertaking to manufacture, transport, and taxed in a manner similar to alcohol, although at a sell, prescribe or use marijuana in accordance with the significantly higher rate. (Rev. Code of Wash. Chapter CCA’s regulatory scheme would violate federal narcot- 69.50.) Washington requires retail licensees to collect a ics law. If the lawyer were to conclude competently and 37 percent excise tax. (Rev. Code of Wash. Section in good faith that the federal law was inapplicable or in- 69.50.535; Wash. Admin. Code 314-55-089.) In addition, valid, the lawyer could so advise the client and would Washington’s business and occupation tax and sales not be subject to discipline even if the lawyer’s advice tax apply. later proved incorrect.’’ (N.Y. Comm. on Prof’l Ethics Op. 1024 (2014) (brackets and ellipsis in original).) California does not follow the Model Rules when ex- ETHICAL CONSIDERATIONS amining the extent to which an attorney must avoid advising clients on matters that may be illegal on a local, It is critical for investors, producers, processors, re- state, or federal level. California Rule of Professional tailers, and other stakeholders within the legal cannabis Conduct 3-210 provides: ‘‘A member shall not advise industry to understand how to comply with the quickly the violation of any law, rule, or ruling of a tribunal un- changing legal landscape. This presents obvious ethical less the member believes in good faith that such law, challenges for lawyers seeking to represent the inter- rule, or ruling is invalid. A member may take appropri- ests of cannabis industry members or fiduciaries who ate steps in good faith to test the validity of any law, must administer property derived from the cannabis in- rule, or ruling of a tribunal.’’ dustry. A lawyer must consider whether he or she may California’s standing Committee on Professional Re- ethically advise and assist a client seeking to engage in sponsibility and Conduct has not issued an opinion on conduct that the lawyer knows is criminal under federal the issue of whether an attorney may ethically advise law or in one or more states. clients on the possession, use, cultivation, or sale of Most states have adopted American Bar Association marijuana under California law. But the Bar Associa- Model Rule of Professional Conduct 1.2 that prohibits tion of San Francisco (SFBA) and the Los Angeles assisting a client in the violation of law: County Bar Association (LACBA) have. Both opinions ‘‘A lawyer shall not counsel a client to engage, or as- concluded that an attorney may ethically advise a client sist a client, in conduct that the lawyer knows is crimi- on how to comply with California law in regard to the nal or fraudulent, but a lawyer may discuss the legal use, cultivation, or operation of a dispensary of medici- consequences of any proposed course of conduct with a nal marijuana, but may not advise the client to violate client and may counsel or assist a client to make a good federal law and must advise the client that the conduct

COPYRIGHT ஽ 2019 BY THE BUREAU OF NATIONAL AFFAIRS, INC. 6 may violate the federal CSA. (LACBA, Comm. on Prof’l s Is an attorney who counsels clients in the canna- Responsibility & Ethics, Formal Op. 527, at 9 (2015); bis industry at risk of being disbarred from practice in SFBA, Formal Op. 2015-1, at 2-3.) The opinions do not federal courts or before federal agencies, even if the at- deal with recreational marijuana. And, the State Bar of torney’s state of admission is not concerned about the California is yet to issue its own opinion. work? Regardless of state law, attorneys need to keep in s Does an attorney’s advice to clients in the canna- mind that federal law continues to make illegal certain bis industry trigger the crime/fraud exception to attor- financial transactions connected to unlawful activity, ney client privilege for federal law purposes? including transferring monetary instruments or funds While the majority of states (and the District of Colum- with the intent to promote the carrying on of specified bia) have legalized cannabis in some form, cannabis unlawful activity, including the manufacture, importa- use, possession, production, distribution, and market- tion, sale, or distribution of a controlled substance. ing remain illegal under federal law. The Cole memo- (Money Laundering Control Act of 1986, 18 U.S.C. Sec- randa, which are only policy statements, suggest that tions 1956, 1957.) Most attorney malpractice policies the federal government is uninterested in overturning exclude coverage for criminal acts. If a lawyer is sued state laws legalizing cannabis or prosecuting individu- for malpractice on a marijuana-related issue, an insur- als and businesses unless their conduct implicates one ance carrier may deny coverage based on the criminal of the listed enforcement priorities. However, the DOJ acts exclusion. And to compound matters, fees derived policy is evolving, provides little protection upon which from marijuana businesses, including fees for advising one can unquestionably rely, and can change in an in- a marijuana business, may be subject to forfeiture un- stant. Therefore, cannabis users and businesses remain der federal law as coming from an illegal source. at risk of civil and criminal prosecution by the DOJ. Whether legal or not, individuals with a business inter- FINAL NOTE est related to cannabis must consider how this asset is to be handled in their estate, and lawyers need to be Many open issues concerning cannabis remain unan- prepared. swered: This column does not necessarily reflect the opinion s Does cannabis cultivation or production on even a of The Bureau of National Affairs, Inc. or its owners. portion of land used as collateral constitute an event of Wendy S. Goffe is a partner with the law firm of Stoel default? Rives LLP, Seattle, Washington, with more than 25 s Might it jeopardize the status of farm and ranch years of experience counseling clients on estate plan- land subject to a conservation easement? ning issues. She is a fellow of the American College of s Does the conservation easement holder have a Trust and Estate Counsel (ACTEC) and a member of duty to enforce the terms of the easement? the ACTEC Digital Property Committee. Her experience s If it doesn’t, does it jeopardize its ability to hold includes advising clients on matters including probate conservation easements or, worse, its nonprofit status? and trust administration, estate and gift taxation, s Could an attorney who counsels clients in the can- charitable giving and nonprofit trusts and corporations, nabis industry be found to have engaged in a criminal family-owned business succession and issues concern- conspiracy for federal law purposes? ing unmarried couples.