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ASSET PROTECTION

Advanced Asset Protection Strategies for the Cannabis Industry and More

The Federal Government, California State, and local law enforcement agencies are aggressively confiscating  cannabis business assets and personal assets of the principals. YOU NEED AN ASSET PROTECTION PLAN

  1. Adequate Insurance
    The lack of insurance for cannabis companies if one of the biggest issues facing the industry. Imagine a multi-million dollar indoor cultivation facility having no fire insurance. Our office can assist your company to get properly insured. This is critical to protect the business and investor funds. ​
  2. IRS Protection
    More than 6% of operational cannabis companies surveyed by Marijuana Business Daily said they have been audited by the Internal Revenue Service, which suggests that the industry faces more scrutiny on the tax front than other sectors. An entity structured should be implemented with IRS protection.
  3. Analysis of Assets
    Let us show how we allocate assets into two (2) buckets of (i) safe assets and (ii) risk assets. Once we understand the makeup of your assets we can assist in designing a plan that can be a combination of vehicles to provide legal asset protection.
  4. Plan from the Start
    Asset protection planning will not be effective to shield property from an existing claim. It must be done long before there is even the hint of a claim.
  5. Structuring Entities
    In tandem with the Analysis of Assets we then assist you in structuring entities to achieve asset protection. The structuring of entities can be done in tandem with an estate plan.
  6. Tie in Estate Plan
    Asset Protection also considers estate planning issues. An attack upon your assets is also an attack upon your estate. Structuring of assets, obtaining life insurance and understanding potential estate taxes and how they will be paid all come into play in an asset protection plan.

AN ASSET PROTECTION PLAN IS CRITICAL TO PROTECT YOUR HARD WORK, MONETARY INVESTMENT & PERSONAL ASSETS.

Asset Protection is More Than Just Asset Replacement:

The goals of asset protection planning are to provide an incentive for settling a claim, improve the client’s bargaining position, offer options when a claim is asserted, and, ultimately,deter litigation. Asset protection planning is not about avoiding taxes, keeping secrets, hiding assets, or defrauding creditors. Asset protection planning will not be effective to shield property from an existing claim.  It must be done long before there is even the hint of a claim. The following can open a business or person up to claims of fraud or fraudulent transfer if any of the following are present at the time the asset protection plan is implemented:

  • ​You are about to be, or have already been, sued.
  • You are about to, or has already, filed for bankruptcy.
  • You are delinquent in reporting and/or paying taxes.
  • You are being audited by a taxing authority.
  • You are directly or indirectly liable for any loans.
  • It is critical you are solvent and will remain solvent after any property transfers.

Get Adequate Insurance: 

Almost everyone has engaged in traditional asset protection planning. The most common type of traditional asset protection planning is the purchase of liability insurance – automobile, homeowners, umbrella, officers and directors, malpractice, and the like. The lack of insurance for cannabis companies if one of the biggest issues facing the industry. Imagine a multi-million dollar indoor cultivation facility having no fire insurance. Our office can assist your company to get properly insured. This is critical to protect the business and investor funds. 

Cannabis is a Schedule I Narcotic under Federal law:

Under federal law, the medicinal and recreational marijuana industry is illegal. According to the feds, you ar a dealer of Schedule I narcotics. The federal government can seize any property related to committing a drug crime or any money made from the sale of illegal drugs. Cars, homes, buildings, equipment, cash, land, etc.  Seized assets go through an "In Rem" court process that usually waits until the conclusion of the criminal case before property can be petitioned to be returned. That can take years and the Federal Government and the Courts know it. Nobody knows if Attorney General Jeff Sessions will ultimately crack down on the industry. Putting an asset protection plan together is critical. Having a 400 acre farm and having cannabis growing on one (1) can result in the entire farm being seized. Separating the land where cannabis to be grown from the rest of the farm is one method, in tandem with a C Corporation leasing the land that cannabis is cultivated. Having all of the land  of entire farm, including your personal residence exposed to seizure is risky at best. 

The Asset Protection Challenges of the Cannabis Industry Include:

  • Gaining access to checking and savings accounts.
  • Gaining access to merchant accounts and credit card processing.
  • Lack of banking, resulting in large volumes of cash being held on site.
  • Increased risk of theft by employees.
  • Increased targeting by criminal organizations.
  • Increased risk of targeting by governmental organizations.
  • Lack of adequate casualty insurance.
  • Lack of liability insurance.
  • Increased risk of audit by the IRS.
  • Increased risk of failing to properly file Forms 1099 and Forms 8300.
  • Risk of rapidly changing business environment.
  • Risk of local jurisdictions reversing course and banning commercial cannabis activity.
  • Rapidly changing regulatory environment.
  • Attorney General Jeff Sessions trying to eliminate the Rohrabacher-Farr Amendment .
  • Aggressive assets seizures by the federal government and local law enforcement. 

Compliance With State Law is Critical:

Companies often face complex disputes with other businesses, government entities, or groups of individuals, which requires that an asset protection plan be in place prior to such disputes arising. An asset protection plan involves business assets, personal assets and an estate plan.​​ 
 

Engaging an experienced cannabis business attorney will help ensure your business is being operated in compliance with the laws of the State of California. Proving compliance with state law may be critical in defending an asset forfeiture. It is hard  to argue what you were doing was legal under state law if you are not in compliance. Staying on the right side of the IRS is important in any business. But never is that more true than if your business is medical marijuana. Real estate trusts and others tools of probate or investment may also afford additional protections under the law. However, much of the protections have now been stripped away because local jurisdictions and the State of California are requiring signed acknowledgement from a landlord that the landlord understands a cannabis business is being operated in the leased premises. This has effectively eliminated the "innocent third party defense" that landlords had to protect against seizures by the federal government. 

Bankruptcy is Not an Option For a Cannabis Business:

The prohibition on bankruptcy filings initiated by companies that deal in cannabis has harmed distressed companies in leveraged negotiations and gives creditors significant leverage over a distressed debtor. Bankruptcy, or the threat of bankruptcy, is a powerful bargaining chip that helps distressed companies level the playing field against aggressive creditors or rid itself of burdensome contracts. Without this threat, many creditors are able to bully distressed companies into accepting onerous or one-sided terms, and that opens up companies to predatory lenders who have designs on seizing control their operations. A cannabis company’s most valuable asset is usually its marijuana inventory, and secured creditors that do not meet the requirements to operate legal marijuana businesses under state or local laws are often prevented from seizing possession of that collateral in a foreclosure. The main problem, of course, is that there is no such thing as bankruptcy for pot businesses. Because cannabis is still a controlled substance, things can get messy. Bankruptcy courts have ruled repeatedly that pot businesses are ineligible for protections under the law. Recently, the Department of Justice directed its minions to stay away from all bankruptcy cases involving cannabis. The main problem, of course, is that there is no such thing as bankruptcy for pot businesses. Because cannabis is still a controlled substance, things can get messy. Bankruptcy courts have ruled repeatedly that pot businesses are ineligible for protections under the law. Bankruptcy is governed by federal law, in federal courts. Hence, it would be impossible for a U.S. bankruptcy trustee to control and administer a debtor’s assets (weed) without violating the federal Controlled Substances Act. Bankruptcy is governed by federal law, in federal courts. Hence, it would be impossible for a U.S. bankruptcy trustee to control and administer a debtor’s assets (weed) without violating the federal Controlled Substance Act. 
​​Protection of Personal Assets and Estate Planning​​
A comprehensive plan to protect personal assets involves structuring assets to protection and the implementation of an estate plan. Click this link " Asset Protection" to download the presentation Mr. Homayouni has given numerous times to hundreds of people. The strategies are easy to understand and implement. We also have a fast link to the Firm's brochure for estate planning and assets protection.  Click Here. Moving into 2018 the considerations for a proper asset protection plan have become even greater. The tax legislation expected to pass Congress this year and be signed by President Trump will result in large spreads between the tax rate of C Corporations, Partnerships, LLCs and S Corporations on one side and Trust vehicles on the other. The future spread in tax rates is expected to be material. The tax proposals being debated in Congress will raise from $5.5 million to $10 million the asset exclusion for estate tax ($20 million for a married couple); with a complete phase-out beginning in 2024.  
THE TEN BASIC RULES
OF ASSET PROTECTION: 

Many states allow their residents to exempt specific assets from the claims of creditors.  This may include protection for property owned jointly by spouses (“tenancy by the entirety” ownership), a primary residence (“protected homestead”), the cash value of life insurance, investments held in a retirement account, and annuities. It is critical as part of the your personal asset protection plan that you understand the statutory protections that are your right.

1. Start Planning Before A Claim Arises: Many things you can do will effectively provide asset protection before a claim or liability arises, but few things will afterwards. That’s because what you do after a claim rises could be undone by “fraudulent transfer” law. 

​2. Late Planning Usually Backfires: Asset protection planning after a claim arises is apt to make matters worse. It is a common misconception that the only thing a judge can do is to unwind a fraudulent transfer,  leaving a debtor who unsuccessfully tried late planning  no worse off than if he had done nothing. To the contrary, both the debtor and whoever assisted in the fraudulent transfer can become liable for the creditor's attorney fees, and the debtor can lose the hope of getting a discharge in bankruptcy.

3. Asset Protection Planning Is Not A Substitute For Insurance: Asset protection planning should not be a substitute for liability and professional insurance, but rather should supplement insurance. It is a myth that asset protection plans invariably scare away plaintiffs, and an asset protection plan doesn't pay legal fees to defend against a lawsuit. Insurance also supplements asset protection planning, since it can help a debtor survive a claim a fraudulent transfer claim. If you get sued, let the insurance company pay to defend it and pay to settle it -- that's what you're paying the premiums for.

4. Personal Assets Are For Trusts; Business Assets Are For Business Entities: Business entities such as corporations, partnerships and LLCs are meant to be vehicles for commercial operations, not to hold personal assets or use the bank accounts without following corporate formalities. When personal assets are placed into a business entity, the potential for the entity to be pierced by a creditor on the theory of alter ego, increases exponentially. The place to put personal assets is in a trust.  There is a long and solid body of law that protects trust assets---when the trust is properly drafted and funded.

5. Too Much Control Is A Bad Thing: Asset protection planning attempts to reach a balance between giving the client sufficient control so that the assets do not disappear, but at the same time not so much control that a creditor can successfully argue that the debtor and the asset protection structure are effectively one-and-the-same and thus should be disregarded on alter ego or some similar theory.​ A new vehicle being accepted by the Courts is an Asset Protection Trust where the assets become seasoned after two years and you can be a co-trustee of the Trust. Nevada has embraced an Asset Protection Trust with case law on the books. 

6. Asset Protection Planning And Tax & Estate Planning Can Be in Conflict: Often asset protection planning and estate planning work together, but sometimes they are at odds and what might be a good idea for estate planning may not be such a hot idea for asset protection. For example, the making of gifts (to children and other prospective heirs)  is common in estate planning but anathema in asset protection planning since gifts are often easy to set aside as fraudulent transfers. Meanwhile, homestead exemptions are a very powerful asset protection planning tool, but this usually traps the value of the home in the debtor's estate.

7. Your Money May Be Offshore But You Are Here: Recent cases have recognized the power of courts to require debtors to bring their money back to the U.S. through what are known as "repatriation orders". If the debtor does not comply with a repatriation order, a court may issue a bench warrant for contempt of court and hold you in contempt (and in jail) until the money does come back. Former safe heavens such as the Cayman Islands has lost their appeal as banking laws become more stringent as a result of international terrorism. 

8. Don't Count On Bankruptcy As The Last Refuge Of A Desperate Debtor: In 2005, the bankruptcy laws changed to ensure debtors were forced to pay back debts (or at least a portion). State homestead exemptions have been substantially limited, and other new provisions in the bankruptcy code and new bankruptcy case law can make parts of asset protection plans very difficult to protect in bankruptcy. Plus, bankruptcy judges have some of the strongest powers to make debtors cough up assets.

9. If Only Your Lawyers Can Explain It, It Will Never Work: Many asset protection plans become so complicated that the person whose assets are being protected cannot explain how assets are held or how those assets were transferred. But such questions can be expected in depositions or a debtor's examination, and a failure to fully and clearly explain what happened and why will make the court very suspicious and potentially give the court grounds to begin disregarding entities or setting aside transfers. If the structure and transfers are too complicated and not well explained, there is a much higher chance that the judge will find fraud on creditors. Indeed, the best asset protection plans are often simple plans, such as creating and funding an irrevocable trust for the benefit of their children.

10. Usually Everything Sees The Light Of Day:
Asset protection planning should be based on the presumption that the entirety of the planning and its purpose will eventually become known to creditors, because one way or another it usually does. Asset protection plans that require secrecy will face a plethora of problems, from how not to disclose the structure or activity on tax returns, to how to keep an ex-spouse or disgruntled employee from talking to creditors. The failure to make a full disclosure in a Bankruptcy Court can result in a denial of discharge, and the failure to make a truthful disclosure can amount to charges of perjury and bankruptcy fraud.​