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Essential Estate Planning Insights for Union Pacific Employees: Unlocking New Opportunities in 2024

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New changes in federal gift and GST tax exemptions provide a unique opportunity for proactive estate planning, especially for Union Pacific employees who want to transfer wealth without incurring significant taxes,' says Kevin Landis, a representative of The Retirement Group, an affiliate of Wealth Enhancement Group.

Brent Wolf from The Retirement Group, a division of Wealth Enhancement Group, encourages Union Pacific employees to take advantage of the temporary increase in gift and GST tax exemptions as a means of effective estate planning.

In this article, we will discuss:

1. The role of Inflation Adjustments: How the 2024 inflation adjustments to federal gift and GST tax exemptions create new opportunities for tax efficient wealth transfer.

2. Strategies for Estate Planning: An overview of various estate planning strategies including SLATs, GRATs, and Dynasty Trusts that can be useful for Union Pacific employees.

3. State Tax Consequences: How state taxes affect estate planning and what this means for residents of New York, New Jersey, and Connecticut.

The federal gift and generation-skipping transfer (GST) tax exemption amounts have been raised due to the latest inflation adjustments from January 1, 2024. This adjustment presents new possibilities for sophisticated estate planning especially for the benefit of Union Pacific employees. It is now possible to exclude $13,610,000 for an individual and $27,220,000 for a married couple from federal gift and GST taxes. In the present economic environment of low asset values these changes present a good opportunity to move wealth across the generations.

The federal estate and gift tax exclusion, as well as the GST tax exemption, were initially heightened by the Tax Cuts and Jobs Act of 2017 and then heightened again by the 2024 inflation adjustments. This enables many assets to be transferred without tax consequences during the owner’s lifetime or at their death. However, these higher exemption levels are only temporary and will return to their pre-2018 levels (adjusted for inflation) beginning January 1, 2026.

The new regulations increase the amount that can be gifted in 2024 by an extra $690,000 for individuals and $1,380,000 for married couples if other exemption thresholds have been used. This update is important as it provides opportunities for taking full advantage of tax-deferred wealth transfers while the tax laws permit it. The American Taxpayer Relief Act of 2012 also allowed the surviving spouse to use the deceased spouse’s unused federal estate tax exclusion in paying for the deceased’s lifetime gifts or estate planning.

The annual federal gift tax exemption has also been increased to $18,000 per recipient, or $36,000 for married couples who choose to gift together. This increase expands the opportunities for tax planning to gift and still leave some exemption available to pay for tuition or medical expenses — important for Union Pacific employees who are helping to pay for their families’ education or health care. It also helps with the possibility of gradual giving.

State Specific Factors to Consider:

This is especially important for residents of New York, New Jersey, and Connecticut because of state tax consequences. For instance, New York does not have a gift tax but has many opportunities to take advantage of large federal exemptions in order to avoid state estate taxes, especially in light of recent market conditions. New Jersey has no gift or estate taxes, but does have an inheritance tax on transfers to non-lineal descendants at rates up to 16%. Connecticut is the only state with a gift tax, but because of the synchronization of federal and state exemptions, the burden is reduced.

Estate Planning Techniques:

In the present tax regime, the following strategies should be considered for Union Pacific employees:

1. Spousal Lifetime Access Trusts (SLATs): These enable the client to invest and grow assets outside the taxable estate while ensuring that the spouse is well provided for through the use of exemption amounts.

2. Grantor Retained Annuity Trusts (GRATs): These provide for the transfer of any appreciation in the assets to beneficiaries without incurring tax on the amount retained in the annuity, which is particularly advantageous in a volatile market.

3. Dynasty Trusts: These trust arrangements are created to take full advantage of the GST tax exemptions and hold assets beyond estate, gift, and GST taxes for multiple generations, providing a long-standing protection against creditors’ claims.

4. Intrafamily Loans and Sales to Grantor Trusts: These methods use valuation approaches and low-interest rates to move the wealth and at the same time reduce the value of the estate that will be taxed, while the assets grow.

Income Tax Considerations:

Grantor trusts are quite efficient from the perspective of income taxes as the trust’s income is reported on the grantor’s return, allowing the assets to grow without being taxed. This structure can be very useful for asset swaps that may reset the basis for capital gains after the grantor has died. In conclusion, the temporary increase in federal tax exemptions presents an important opportunity for Union Pacific employees to plan their estates. Using these exemptions together with sophisticated gifting and trust arrangements can lead to substantial tax savings and wealth protection.

It is, therefore, important to have a clear understanding of both state and federal tax laws and to have an appropriately tailored estate plan to meet personal and family objectives. The state estate taxes can significantly influence estate planning and therefore cannot be ignored, particularly for people nearing retirement or who are already retired. This is especially important in states such as Massachusetts and Oregon where the estate tax starts at $1 million in value and it is imperative to use federal exclusions to avoid state tax consequences while maximizing on federal tax benefits.

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These adjustments to the GST and federal gift tax exemptions are like steering a ship through a rapidly changing sea. Like a good captain, Union Pacific employees can take advantage of these temporarily higher exemptions, now at their highest ever, to steer their retirement.

Disclosure: Not tax advice. Please consult with a qualified tax professional regarding your unique situation.

Sources:

1. 'IRS Provides Tax Inflation Adjustments for Tax Year 2024.' Internal Revenue Service, 9 Nov. 2023, www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024 .

2. 'How Do the Estate, Gift, and Generation-Skipping Transfer Taxes Work?' Tax Policy Center, Jan. 2024, www.taxpolicycenter.org/briefing-book/how-do-estate-gift-and-generation-skipping-transfer-taxes-work .

3. 'Estate, Gift, and GST Taxes.' American Bar Association, 2024, www.americanbar.org/groups/real_property_trust_estate/resources/estate_gift_and_gst_taxes .

4. Driessen, Grant A., and Jane G. Gravelle. 'Overview of the Federal Tax System as in Effect for 2024.' Congressional Research Service, 2024, crsreports.congress.gov/product/pdf/R/R45145.

5. 'What's New — Estate and Gift Tax.' Internal Revenue Service, 2024, www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax .

What are the specific eligibility requirements for employees of Union Pacific Corporation to participate in the pension plan, and how might these requirements evolve as IRS regulations change? Understanding how Union Pacific Corporation aligns its eligibility criteria with broader IRS regulations can help employees assess their own eligibility for the pension plan, particularly in light of any new IRS guidelines issued for 2024.

Eligibility Requirements for Pension Plan Participation: Eligibility to participate in the Union Pacific Corporation pension plan is governed by specific criteria set forth in the plan documents. As of January 1, 2018, the plan was closed to new participants, meaning individuals hired on or after this date are not eligible. For existing employees, eligibility to accrue benefits continued provided they were active participants as of December 31, 2017, and remained in covered employment. Changes in IRS regulations could potentially alter these eligibility criteria by requiring adjustments to maintain compliance with legal standards, potentially affecting who can accrue benefits in the future.

How does Union Pacific Corporation calculate an employee's final average compensation for pension benefits? Given the potential for changes in compensation structures, it is essential for employees at Union Pacific Corporation to comprehend how their average compensation is determined and how this figure might impact their retirement planning.

Calculation of Final Average Compensation: The pension plan calculates an employee's final average compensation based on the average monthly compensation over the 36-consecutive month period out of the last 120 months of active participation that yields the highest average. This includes base pay, overtime, and certain incentive and bonus payments. Understanding this calculation is crucial for employees to appreciate how raises, bonuses, and other compensation changes might impact their pension benefits.

What forms of payment options are available to employees of Union Pacific Corporation when they choose to retire, and how do these options influence the total benefit received? Employees need detailed information on the different payment structures to make informed decisions that suit their financial needs in retirement.

Payment Options Available at Retirement: Union Pacific offers various payment options for pension benefits upon retirement. Employees can choose a lifetime annuity or opt for joint and survivor annuities, providing continued benefits to a designated beneficiary. Other options include certain annuities that guarantee payments for a set period, regardless of the employee's lifespan. These choices allow employees to tailor retirement benefits to their financial needs and family circumstances.

In what ways does Union Pacific Corporation integrate Social Security and Railroad Retirement benefits into the pension plan, and how does this integration affect the overall retirement income for employees? Employees should explore the implications of these benefits on their pensions to develop a comprehensive retirement income strategy.

Integration of Social Security and Railroad Retirement Benefits: The pension benefits are coordinated with Social Security or Railroad Retirement benefits through an offset formula in the pension plan. This integration reduces the pension benefit by a portion of the government retirement benefits projected at the time of retirement, reflecting that some of the funding for these benefits comes from Union Pacific. Employees need to understand how this interaction affects their total retirement income to plan effectively.

What strategies can employees of Union Pacific Corporation employ to maximize their pension benefits prior to retirement while adhering to IRS limits? Employees must be informed of practical steps they can take to enhance their benefits within the framework established by IRS guidelines.

Maximizing Pension Benefits: To maximize pension benefits under the IRS limits, Union Pacific employees can ensure they maximize their earnings during the final average compensation period, continue employment as long as possible to increase credited service, and make strategic decisions about retirement age and benefit commencement. Understanding the interplay of these factors with IRS contribution and benefit limits is essential for optimizing pension payouts.

How does the vesting schedule work within Union Pacific Corporation's pension plan, and what implications does this have for employees who leave the company before full vesting? An understanding of the vesting schedule is crucial for employees at Union Pacific Corporation to grasp the long-term benefits they might forfeit by leaving before they are fully vested.

Vesting Schedule: The vesting schedule is crucial as it determines an employee's entitlement to pension benefits upon leaving the company before retirement age. Union Pacific's plan requires employees to complete five years of vesting service to qualify for a vested benefit, which is payable as early as age 55. Employees considering leaving Union Pacific should be aware of how their vesting status might affect their pension entitlements.

What responsibilities do employees have to keep Union Pacific Corporation informed about their earnings records, particularly when claims for benefits arise, and what might happen if these records are not accurately reported? Employees should be aware of their duties to maintain their benefits and the potential consequences of noncompliance within the pension plan.

Responsibilities for Reporting Earnings: Employees are responsible for ensuring that Union Pacific has accurate records of their earnings to calculate pension benefits accurately. Failure to report or correct discrepancies in earnings records can lead to miscalculations in pension benefits, affecting retirement income. It's vital for employees to regularly review their earnings records and report any inaccuracies.

How does Union Pacific Corporation ensure compliance with ERISA regulations as they relate to employee retirement benefits, and what rights do employees have under these regulations? Employees of Union Pacific Corporation should familiarize themselves with their rights under ERISA to ensure they are adequately protected when claiming pension benefits.

Compliance with ERISA Regulations: Union Pacific ensures compliance with the Employee Retirement Income Security Act (ERISA) regulations, which protect employees' rights to their pension benefits. Employees have specific rights under these regulations, including the right to receive information about their pension plan, appeal denials of benefits, and sue for benefits or breaches of fiduciary duty. Awareness of these rights is important for employees to safeguard their benefits.

What happens to the pension benefits of employees of Union Pacific Corporation in the event of a company merger or acquisition, and how can employees prepare for these changes? Understanding the potential impacts of organizational changes on their pension benefits can enable employees to safeguard their retirement plans.

Impact of Company Mergers or Acquisitions: In the event of a merger or acquisition, employees' pension benefits could be affected. Union Pacific's pension plan provisions include terms for handling benefits under such circumstances. Employees should be proactive in understanding how these corporate changes might impact their pension benefits and seek clarity on their rights and options.

How can employees of Union Pacific Corporation contact the Benefits Group to inquire further about the pension plan and related questions? Clear guidance on contacting the Benefits Group will assist employees in accessing the information necessary to navigate their retirement options effectively.

Contacting the Benefits Group: Employees with questions or who need assistance regarding their pension plan can contact Union Pacific's Benefits Group. Having the contact information handy ensures that employees can promptly address concerns or seek guidance about their retirement benefits, aiding in effective retirement planning.