May 2020 Newsletter

An economic depression is a severe downturn that lasts several years. Fortunately, the world has only experienced one economic depression. That was the Great Depression which lasted for 10 years. The decline in the gross domestic product growth rate was bigger than anything experienced since then:¹

• 1930: -8.5%
• 1931: -6.4%
• 1932: -12.9%
• 1933: -1.2%
• 1938: -3.3%

U.S. economic output fell from $1.1 trillion in 1929 to $817 billion in 1933, even after removing the effects of deflation.²

Prices fell 27% between November 1929 and March 1933.³ World trade plummeted 66%, as measured in dollars, between 1929 and 1934.⁴

By 1933, the unemployment rate had climbed to 24.7%.⁵ For those who remained employed, manufacturing wages fell 34% between 1929 and 1932.⁶

Key Takeaways

• An economic depression is an extremely severe, long-term contraction in economic activity.
• In a depression, GDP annual falls more than 5% and unemployment is in the double digits.
• The 10-year Great Depression was the world’s only depression.

How a Depression Compares to Past Recessions

What differentiates a recession from a depression? A depression is longer and it more severe. In a recession, the economy contracts for two or more quarters. In a depression, it contracts severely for two or more years. Here are some comparisons of the Great Depression with recent recessions.

• The Great Depression suffered five years when the economy contracted. Three of them contracted more than 5%.
• During the 2008 recession, the economy contracted 0.1% in 2008. and 2.5% in 2009.¹
• The 2001 recession had some bad quarters but no years that were negative.
• In the 1980s recession, 1980 was down 0.3% and 1982 was down 1.8%.
• In the 1970s recession, the economy contracted 0.5% in 1974 and 0.2% in 1975.

Important: The closest America came to a second depression was right after World War II.

After the war, the country suffered two recessions. Only one year, 1946, was as bad as a contraction as occurred in the Great Depression. Economic engines struggled to readjust to peacetime production. The economy contracted the following four years out of five:

• 1945: -1.0%
• 1946: -11.6%
• 1947: -1.1%
• 1948: +4.1%
• 1949: -0.6%

Causes

An economic depression is so cataclysmic that it takes a perfect storm of negative events to create one. Many experts say that contractionary monetary policy aggravated the Depression.⁷

The Federal Reserve rightly sought to slow down the stock market bubble in the late 1920s. But once the stock market crashed, the Fed kept wrongly raising interest rates to defend the gold standard. Instead of pumping money into the economy and increasing the money supply, the Fed allowed the money supply to fall 33%.⁸

The Fed’s actions created massive deflation, where prices dropped 10% each year. As people expected lower prices, they delayed purchases. Real estate prices fell by a third.⁹ People lost their homes. The Great Depression began in August 1929 and didn’t end until June 1938.

Note: The 1933 “New Deal” created many government programs that briefly ended the Depression.

But in 1936, Congress decided it was more important to balance the budget and began raising taxes. The Depression returned in 1937, sending unemployment into the double digits until 1941. The U.S. entry into World War II created defense-related jobs. Since production capacity had declined during the Depression decade, new capacity had to be built.

Preventing Another Depression

Many people worry that the world could experience another economic depression. That’s especially since the start of the COVID-19 coronavirus pandemic. In March 2020, panicked investors sent the stock market crashing. It ended the 11-year bull market begun on March 5, 2009.¹⁰ Between March 15, 2020, and April 25, 2020, more than 30 million people filed for unemployment insurance.⁹

The Federal Reserve estimated that the second-quarter U.S. unemployment rate could be 32.1%.¹¹ That rate is higher than the worst of the Great Depression.

Important: COVID-19 could cause a recession on the scale of a depression, but it’s unlikely that it will last 10 years.

There are four reasons why a depression on the scale of 1929 could not happen exactly the way it did before:

The New Deal

Many New Deal laws and government agencies were put in place because of the Great Depression. Their express purpose was to prevent any more of that type of cataclysmic economic pain. For example, the Federal Deposit Insurance Corporation guarantees bank deposits. That restores depositor confidence and prevents future bank runs.

Central Bank System

Central banks around the world, including the Federal Reserve, are so much more aware of the importance of stimulating the economy with expansive monetary policy.

Central banks acted in a coordinated fashion to prevent a depression in October 2008 by bailing out banks. They lowered interest rates, pumping credit into the global financial system. It also restored confidence among panicked bankers, who were unwilling to lend to each other for fear of taking on each other’s subprime mortgages as collateral.

Inflation Rate Targeting

The Fed adopted a policy of inflation rate targeting to prevent the deflation associated with a global depression. As a result, the Fed will continue expansive monetary policy ward off deflation.¹²

Fiscal Policy Working With Monetary Policy

There is only so much that monetary policy can do without fiscal policy. In March 2020, Congress passed the $2 trillion Coronavirus Aid, Relief, and Economic Security Act.¹³ In 2009, the economic stimulus bill helped prevent a depression by stimulating the economy.¹⁴ Working together, monetary and fiscal policy can prevent another global depression. It is highly unlikely that the Great Depression could happen again.

^{Source: Amadeo, K. (May 4, 2020). https://www.thebalance.com/what-is-an-economic-depression-3306013}

^{Footnotes: https://www.thebalance.com/what-is-an-economic-depression-3306013#citation-1}

Self-isolation and quarantines have given rise to unique problems and a new way of thinking. With a global pandemic and health and wellness becoming a huge priority in people’s lives, it seems like a good time for all of us to reflect on our preparedness for the future and to confirm that our families are well protected in case of sickness or even worse.

This is all the more important because if you get sick and are hospitalized due to COVID-19, you will be immediately isolated from any family making all of this advance planning and organization even more important. Keep everyone in the loop and make sure your wishes are heard through the chaos. Let’s review the tried and true principles as well as some new directives for estate planning in the Age of Coronavirus.

1. Get your documents in order

Make sure your estate plan is up-to-date and reflects your current wishes. This commandment would seem obvious, but it is often neglected. Until now. Let’s get your house in order. In addition, many people should have been updating their estate planning documents as a result of the Tax Cuts and Jobs Act of 2017, and more recently, the SECURE Act. Most of those were financial reasons, and now we have health reasons, as well.

Start by performing an inventory and collect the documents in one place (whether it is a virtual or digital home or an actual physical location—we prefer both, belt and suspenders). Make sure passwords and logins are accessible by the right people.

Those documents should include the following:

• Will
• Trust documents (for more complex estates)
• Financial Power of Attorney
• Advanced Directive/Healthcare Power of Attorney
• Life Insurance Policies
• Retirement Plan Documents
• IRA and Roth IRA Documents

We will touch on these in more detail, but first, it’s important to know which ones exist.

Once these documents are collected, create a ”Grab and Go Package.“ This is an envelope that lives near the primary exit of your home and includes all your estate planning documents as well as medication and allergy information, personal information, emergency contact, and your primary physician’s information.

And again, have all those documents stored digitally, whether it is Egnyte, eMoney vault, or some other accessible digital home. And make sure that the trusted person knows how to access those documents.

If any of the above documents are missing, make a plan to get them drafted and executed in a timely fashion. (Note: Capital Advantage can keep copies of some of these documents for clients in a digital vault through our client portal.)

2. Everyone needs a durable power of attorney

An ordinary power of attorney allows a designated agent to make decisions on behalf of an individual. What many individuals may not be aware of is that certain types of powers of attorney can be suspended if they become mentally incapacitated (powers of attorney spring into effect upon disability).

For a power of attorney to stay in effect when you are mentally incapacitated (such as being put in an induced coma to go on a ventilator while suffering from COVID-19), you will need a durable power of attorney.

A durable power of attorney is among the most powerful documents that can be created, as it will not only allow the named agent to do everything from paying the individual’s water bill to making gifts and filing and paying taxes. Different agents can be named for various roles and should be highly trusted individuals, though that does not have to mean family. Whoever is named should be aware of their appointment and willing to take on the role. And there should be a long conversation between you and the agent about what should happen if the power of attorney is exercised.

3. Consider a revocable trust

When most people think of an estate plan, they think of a last will and testament as the centerpiece. In reality, the linchpin in most people’s estate plans is actually a revocable (living) trust. Why? Primarily, if a trust exists, many of the assets will have been contributed to the trust and therefore the estate avoids going through probate. In addition, a living trust avoids ancillary probate, which is helpful if you own real estate in several states. Finally, a living trust is nice as it provides a seamless transition, particularly if you are single or widowed.

Probate can be both expensive (attorney fees, court costs, and executor’s fees), and time-consuming. When an estate goes through probate, it risks getting tied up in the courts and distributions from the estate can take months (if not longer) to actually transfer.

The trust works as a separate entity that holds all of an individual’s assets (a little like being the sole owner of a corporation) while she is alive. However, at death (or if mentally incapacitated), a named “successor trustee” steps into the individual’s shoes. This can be helpful in case of the unexpected.

The trustee can be a child, friend or professional fiduciary (so a bank or trust company counts). This last option can be a prudent choice if you feel the need to remove beneficiaries from the process of distributing assets at death.

4. Have an advanced health care directive

An Advanced Health Care Directive describes, in very specific detail, what type of life-saving intervention the individual would like and in what situations it is to be used. These documents are usually concerned with treatment in a situation where there is no expectation of a patient’s recovery (severe brain damage, permanent unconsciousness, etc).

Sometimes an individual will opt for a Health Care Power of Attorney in addition to an Advanced Health Care Directive which means that these decisions will be made by an individual rather than solely in accordance with a written document. If you opt for this, you should select a single individual. This will allow doctors to communicate and take direction from one person. Sometimes, an attorney will draft both documents together, and they are subject to state law so make sure you are familiar with your state’s laws and that you update these documents when you move to another state.

Any health care directive should also include a HIPAA authorization. HIPAA (Health Insurance Portability and Accountability Act) is the law that protects your medical privacy. However, in the event of an emergency, you will want to authorize an individual to receive your medical information so they can stay apprised of the situation.

This issue arises often with college-age kids. College kids are almost all over the age of 18 which means that their medical information is protected by HIPAA. While this rule may protect privacy, it can also block parents from being able to help kids living hundreds of miles away when a medical emergency arises. Under this rule, if a student ends up in the hospital, her parent has no right to be informed of the condition of the student or even talk to the doctor. This can make for a terrifying experience and can hinder the parent’s ability to help their child navigate the beast that is the American health care system (a system they have likely never confronted on their own).

To prevent this from happening, sit down with your child and fill out three documents as soon as his or her 18th birthday rolls around: a HIPAA authorization, medical power of attorney, and durable power of attorney. When your child enrolls in college, make sure you fill out these documents for the state in which they are attending school so any doctors or administrators who come in contact with the document will be familiar with it. Don’t forget to check if the college or university has its own form and fill that out too.

Even if your child has been sent home during the pandemic, if they get hospitalized, you may want to remind them that they are not invincible. You will be in the same boat as if they were on the other side of the country, and therefore these documents are needed now for everyone. Especially with overwhelmed and overcrowded health care systems, there will be few if any spare people to deal with an issue like this on a moment’s notice if it arises.

5. Amid all this chaos, don’t forget to include and fund health care accounts

Individuals may need access to cash flow to help pay for medical treatment and that money will likely come in two forms: health insurance and a health savings account.

Compile a list of health insurance policies and make it accessible to any individuals who will need it in case you are incapacitated. Similarly, if you have a health savings account (HSA), make sure the family is familiar with it and can access it if they must.

If you have older parents, you might want to review their Medicare and health insurance policies. If your children are over the age of majority but still on your health care plan, you should make sure their paperwork is in order. By reviewing these documents now you will address any issues with health care coverage while things are still fine. Dealing with an insurance issue after someone is in the hospital is challenging and stressful during an already stressful time.

6. Update your beneficiaries and include contingent beneficiaries

We bring this up to address any contradictions between documents. In the review of your documents, you should also review the beneficiaries of trusts, 401(k) plans, IRAs, Roth cccounts, pensions, and life insurance. If there are any disagreements between these documents and a Will or Revocable Trust, you should revise them.

It is important to note that beneficiaries, as named on these documents and policies, will supersede any beneficiaries of these assets as outlined in a Will or revocable trust. There may also be a good chance that no beneficiary has been named for some of these plans. A beneficiary should be named promptly if this issue is discovered, and best practices require a contingent beneficiary, as well. This can come in handy if a beneficiary (say a wife) wants to disclaim the asset in favor of the children, particularly where it could save taxes under the SECURE Act.

7. Communicate clearly and get it done now

The continuing idea and final step in this process is communication. We cannot stress enough that if you get sick and are hospitalized due to COVID-19, you will be immediately isolated during your treatment from any family making all of this planning even more important.

^{Source: Taylor, D. (April 8, 2020). http://www.horsesmouth.com/7-estate-planning-mustdo-s-in-the-time-of-coronavirus}