Tax-Free Millionaires Podcast-episode #8
Welcome to the eighth episode of the tax free millionaires podcast. I'm your host Reed Scott. And in today's episode, I'll be showing you a unique way to create a tax free legacy for your family. And I call it the grandchild tax free trust. I'll show you what it is, how to create it and how powerful it is for creating tax free wealth.
For your family, not just your grandchild, but your children as well. And also how to get more power out of your taxable retirement accounts. And be sure to stick around until the end. Well, I'll be giving you my stock pick of the week as always. So welcome everyone for this holiday edition. We're right after Christmas and new years, and we took a little break for the holidays, but now we're back on it in the first episode of 2025.
So welcome. And as I mentioned in the introduction. In this episode, I'm going to be discussing the grandchild's tax free trust, what it is, how it came to be, and how powerful it is for creating tax free wealth, generational wealth for your family. So for those of you who have listened to my podcast before, or read my book, Tax Free Millionaires, you know I was a financial analyst for Ford Motor Corporation and managed a large investment portfolio, over a billion dollars.
And then I went on to become a tax attorney and I practice as a wealth advisor and tax attorney for over 20 years while I was practicing as a tax attorney. One of the techniques I use to create great wealth for families was what's called the grandchild's trust. But this was back before Congress changed the law and you used to be able to have a stretch IRA.
So for those of you who aren't familiar with it, with what a stretch IRA is, Back before 2020, before the secure act was passed, if you had a taxable retirement account, either a 401k or a traditional IRA at your death, if you were leaving it to someone other than your husband or wife or spouse, in other words, if you left it to a non spouse beneficiary, they.
Had to pay taxes on the money in that retirement account based on their life expectancy. So they used to be that, let's say you left a taxable retirement account to your adult child. They could stretch out the required minimum distributions until they were 85. So, yes, it's true when someone inherits a retirement account, they also have a required minimum, except unlike the owner of the account.
they don't get to defer taking money out until they're 72. They have to take it out the year after they inherited it. So even though they're maybe 35 or 30 or 40, they have a required minimum distribution are used to the year after they inherited. And so this was nice because if someone inherited. Three or four or 500, 000 or millions in a taxable retirement account.
They only had to take a small RMD based on their age. If they were say 35 or 40, and they could defer the rest of it to grow tax free in there and take out the required minimum every year until they were 85. And they had to empty it out by the time they were 85. So you could see that if someone were in their forties, they have over 45 years to defer taxes.
Well, Congress changed the law in 2020. , and they called it the secure act and the secure act said that no longer could you stretch these inherited IRAs out over your lifetime. You had to pay all the taxes within 10 years. Now as a tax attorney, before Congress changed the law, we did something very powerful for clients who had money in a traditional taxable deferred retirement account.
And what we created was what was called a generation skipping grandchild's trust. Now, if you had grandchildren. You could skip giving the money and every tax and a taxable retirement account and skip your children and give it to your grandchildren. Now we didn't really give it to your grandchildren. We just use the grandchild's measuring life in terms of recalculating the required minimum distributions.
So if you remember, I said, if an adult child inherited and they were 40, they could defer it until they were 85. But what if you left it to a grandchild who was five, then they could defer it till they were 85. That meant you had twice as long to defer taxes, which meant the account actually became worth more than three to five times more than if you left it to an adult child because of the tax deferral.
This was a powerful planning technique and people would say, well, gee, but I can't leave it to a grandchild. They're too young. That's true. That's why we left it in a trust to the grandchild. And , we appointed the adult child As the trustee. So this was the best of all possible worlds. The child was in charge of the money, but from the IRS's perspective, in terms of how they calculated RMDs, [00:05:00] it was the grandchild, there was nothing they could do about it, except lobby Congress hard to change the law, which is what happened.
So the IRS said in Congress said, we need more money. So we're going to stop this skipping generations and stretching these IRAs out forever, because And we're going to require whether you leave it to a child or grandchild, whoever you leave it to, if they're not your spouse, they're going to take it out within 10 years, add that to their income and pay all the taxes.
And even if you leave it to a grandchild, if they're under 18, we're going to treat it as if you left it to a child in terms of calculating a tax. In other words, if you left it to a seven year old grandchild, They're going to calculate the tax based on what your 40 year old child was earning and add that money to the child's marginal tax rate.
So you're going to pay the highest rate regardless of whether you left it to a child or grandchild. So there was no advantage of skipping a generation anymore, and actually in some cases, a disadvantage. So, how do we get around that then? What can we do to fact that the IRS and Congress stole, literally stole all this money from Americans.
How did they steal it? Well, in my opinion, for 50 years, they told people. Look, put as much money as you can into these deferred taxable accounts. Don't pay the taxes, let it build up their tax free, and it's a huge benefit for your family. And then they changed the rules after people have been doing this for 50 years and said, Ah, now that you've got all that money in there, we're going to take it from you.
We're going to eliminate that contract that we made with you that said you could leave it to your family as an incredible legacy. And now you're going to leave it as a legacy to the IRS if you die with a large retirement account. And again, for those of you who aren't aware of this, people often say they're confused by this.
They go, well, I have a 401k. I don't have a IRA. Well, it doesn't matter what you have while you're alive. When you die, if it goes to a non spouse beneficiary, whether it's a 401k or an IRA, it will become an IRA. So if you have a 401k that you had one at work and you kept it in there, it's going to become, it's going to automatically convert to a taxable IRA.
Uh, individual retirement account at your death. So your child, your non spouse beneficiary will inherit , what's called an inherited IRA, whether it was a 401k or an IRA at your lifetime, the owner's lifetime. So I'm going to use the term IRA. So there's no confusion. I'm not going to jump between 401k and IRA.
I'm just going to call it an inherited IRA because that's what it is, whether you own it as an IRA or 401k. So these inherited IRAs are a big problem now because they are going to be taxed at up to 50 percent because it's going to be put into your child's estate. It's going to be added to their income on their income taxes.
If they're working, which they probably are, it's probably going to bump them up in the next highest bracket, perhaps even , the highest bracket. And if they live in a state with state income taxes, it's going to be taxed. With the state income taxes in the federal taxes and over 21 states in the United States have an inheritance tax.
So they might also be subject to an inheritance tax. So it's conceivable. That the 500, 000 you think is going to go to your children is going to be 250, 000 and the other 250, 000 is going to the IRS.
And now Congress has eliminated that with the Secure Act. They told the American public it was for their benefit. Of course, they said, ah, look, we're gonna do for you. We're gonna let you put an extra $500 a year into the account at work, and we're gonna let you defer taking your required minimums from 71 to 73.
Big deal, because they picked up hundreds of billions of dollars on the back end. Because if you die with a lot of money in a taxable ira, it will go to the IRS as I just explained. Now, at the time that the secure act pass, the financial industry said, aha, this is an opportunity for us as financial advisors to get more assets under management, which is how they get paid.
So they sent out a tremendous marketing campaign saying, well, now that the stretch has been eliminated time to do a Roth conversion. So let me show you something that's about 10 times more powerful. Now, if you listen to my last episode, episode seven, this is eight.
If you listen to that episode, we talked about something that's more powerful than a Roth conversion for you, because it allows you to convert that taxable retirement account into a large pot of tax free money that you can use while you're alive. But if you don't need the money for yourself, this is probably even more powerful.
So you could still use this money for yourself and you could follow the instructions that I had in episode seven, my last episode. But let's say you have grandchildren, then the strategy I'm going to talk about today could be even more powerful than what I talked about on my last episode. And. If you have a lot of money in a taxable retirement account, again, whether that's 401k or an IRA, this is an opportunity to create a tremendous tax free legacy for your family and not just your grandchild, but your children as well, because remember I said, when we did those generation skipping, grandchild's trust before Congress changed the rules and created all this, tax deferred money, now we can do the same thing, except instead of it being tax deferred, it can now be tax free.
This is an incredible opportunity and we can do this with the same technique I've been talking about last week, which was an index universal life policy. And you can get that on a grandchild. Now people are often confused. They'll say, well, I, you can't get insurance on a minor. And the answer to that is absolutely you can't, if you have an insurable interest.
And as a grandparent, you have an insurable interest. You there, your grandchild, you have the right to buy life insurance on them. You have a family relationship. You're protecting them. It is absolutely your right to do that. Now let me eliminate some of the confusion around this, because a lot of insurance agents don't know this, people don't know this, doctors don't know it.
There's no difficulty. Insurance companies know what they're doing now to insure a juvenile. They make it very easy to do. So, now we can create, again, just like we did before the Secure Act passed, we can create a grandchild's tax free trust, except now, before it was only tax deferred, now it's tax free.
Because an index universal life policy allows the investment inside of it To grow, not just tax deferred, but tax free, it's never going to get taxed because not only does the investments inside the policy grow tax free when they take it out, your grandchildren or your child, it will be tax free as well.
And I'll get to that in a minute. So it's just like a Roth account except infinitely more powerful because the investments in it are more powerful in my opinion and it is protected from losing money. You are making a contract with the insurance company that you can invest in, , stock market indexes, and they will guarantee that your principal will go up.
Can not go down from the prior year, so you can't lose money. How do they do that? They do that by allowing you to invest in an index like the standard and poor, and they'll cap your upside. They'll say, yes, the standard and poor might go up 20 percent this year, but we're capping you at 10. You only get 10.
We get the difference. And that difference is how they fund that protection. So if you think that's unfair, remember the people who had Roth accounts and they went down 30 percent in 20, 2008 would love. To have had an account that couldn't have lost that money. So when we're talking about building a tax free legacy, this protection for stock market, corrections is very important.
So yeah, you may only make 10%, but remember that 10 percent is tax free and it's protected from losses in the market. And when you take it out, it's tax free. So it's just like a Roth except with protection. This is the power of this tax free legacy. So , how can you have money going to a grandchild when they might be five or six or ten when you get the policy on them?
You don't want them to have access to this money. So we do the same thing we did before with the, the grandchild's, trust back when we were handling a deferred taxable IRA. Except now, inside the trust is the index universal life policy. You, as the owner of your individual retirement account, or 401k, are going to buy an insurance policy for your grandchild or grandchildren, if you have more than one, and we're going to put that policy in a trust.
And it's, it's a very simple to do trust. I am a tax attorney. I did hundreds of these, and it's the same concept when you're doing insurance as it was for the, individual retirement accounts. We make the beneficiary of the trust, your grandchild, but we make the trustee. In other words, the one who's managing the, insurance, your adult child.
So , your adult child has access to this tax free money for the benefit of your grandchild. In reality, , they're going to be able to use that money for their family. , and. The nice thing about this is we're going to be able to have this money grow tax free based on the life of your grandchild.
Now when you buy an index universal life policy, there are several designs that you can get. One is for a death benefit and one is for maximum accumulation. We're going to design this as a maximum accumulation policy, which means under the law Tamra, which is the technical administrative miscellaneous revenue act of 1988.
You can design a policy in such a way that a very small amount goes to death benefit, and most of your principal goes , to stock market indexes that are pro tax free. So that's what we're going to do. And we're going to use a life of a young beneficiary, which means because there's so young, the principal that you pay.
For life insurance, a death benefit is very small, because what's the probability they'll die is very low. So it's going to be cheaper to buy this policy on a grandchild than it is an adult child. More of the principle that you put into it will go to investments that are going to go tax free. Yet the child, your adult child, is going to be the trustee.
Reed: And this keeps the grandchild from doing something silly. So if the grandchild's 18 and they could get access to all this money, if you just gave it to them outright, , now you have your adult child stating there's a trustee and said, no, no, no, you, yes, I know there's a half a million dollars in the account and you'd like to buy a Corvette.
Or Ferrari or whatever you want, but that's not going to happen because I have to sign the checks. So we have the best of both worlds. We have tax free growth based on the youngest beneficiary. but the money is actually managed by your adult child ,,,
Reed: So I did an illustration on a five year old grandchild and And We paid just 10, 000 a year for 10 years. By the time that grandchild is 65, there's over 4 million in that policy. Let me repeat that 10, 000 a year for 10 years into an IUL. By the time that grandchild is 65, there's over 4 million of tax free money.
In that policy inside the trust now, obviously there's, there's a lot of money in there even earlier. So if your child wants to give money to your grandchild earlier, you can, but think of that. If they never touched that money, there's this huge pot of money that's going to be there for your grandchild.
And then your great grandchildren, millions of dollars tax free, and , you could fund that taking 10, 000 a year out of your retirement account. And pay the premium and pay the taxes on the 10, 000 from some other area, or take out additional money to pay the taxes from your retirement account.
So let me repeat that instead of doing a Roth conversion, you take 10, 000 a year out for 10 years of your taxable IRA or 401k, and you pay the premium for 10 years on the index universal life insurance policy for your grandchild. By the time they are 65, there will be over 4 million tax free. In it. And that's at a 7 percent rate of return annually, inside the index universal life policy in indexes like the S& P 500, which over the last 20 years has done a little over 8%, so there's no guarantee that will continue, but that's been the average annual rate of return on the S& P 500 for the last 20 years. So even if the insurance company is capping you at 10 and you can only get 10, the average has been 8.
That means the insurance company is going to get in excess of 10. And by the way, each policy is different and we help our clients pick out what I believe are the best policies with the best options. There are lots of indexes you can choose from, stock market indexes, not just the S& P 500. There are all different ways to structure this and allocate your investments inside the policy.
All those indexes grow tax free. Again, you are protected from a downturn or correction in the market. So you can invest in the market, participate in the upside with no risk on the downside.
I think it's an incredible that you can't get if you just did a Roth conversion. And because you have the insurance policy on a younger beneficiary, You're spending a very small amount on life insurance and a tremendous amount on tax free investment growth. So, I think this is even more powerful than the hundreds of grandchild's generation skipping trust I did before the tax law changed.
So when the Congress changed the law and took away the ability to do stretch IRAs, I looked for something to benefit the clients I'd done these hundreds of trust for, and I found it. I've calculated difference. Let me tell you, there's much more wealth that could grow inside these IUL policies in a trust for grandchild than we could ever get before when we did a generation skipping, IRA trust when we were just getting a tax deferred growth.
Because section 7702 of the internal revenue code says, uh, You can borrow against the cash value of your indexed universal life policy. So you don't take a distribution.
Your trustee, your adult child would not take the money out. They just borrow against the cash value and loan proceeds are not taxable. That's right. Loan proceeds are not taxable. When you go and get a loan at a bank, do you pay taxes on the loan proceeds? Of course not. This is the same principle.
And you're not going to pay a loan payment. Your adult child is trustee, can borrow against the cash value inside the policy. Use it for whatever purposes for the benefit of the family and the grandchild. Not pay any income tax on it. So the growth is free. The access is free.
And by the way, they never have to pay that loan back. It just gets deducted from the cash value at death. So there's an additional benefit. Thank you. That many people are not aware of, and that is when your adult child is the trustee, borrows against the value of the policy. If it's making 7 percent because of its investments, and they borrow at 5 percent on the loan, which is a typical rate right now, they're going to make 2 percent of what is called arbitrage on the difference.
So they're going to be borrowing less than what they're earning. The cash value of the policy does not change. Decline because you took a loan on it. So let's say you had 400, 000 worth of cash value in a policy and your, your son or daughter borrows 50, 000. It is not going to be deducted. In other words, the cash value policy is going to stay at 400, 000.
It's not going to go to three 50 and it's that 400, 000 is going to continue to earn 7%, but you're only going to pay 5 percent on the 50, 000. And. That 2 percent difference is arbitrage, the money you make on borrowing against your own cash value. It's an incredible way to create even more additional wealth.
I couldn't have done this in a tax deferred grandchild's generation skipping trust before the SECURE Act. Now, after SECURE Act, The IRS has created this tremendous benefit because I've found something that allows us to create even more tax free wealth for our clients with this generation skipping Indexed Universal Life Grandchild Trust.
. So, this is the tremendous benefit. By the way, so I gave you an example, earlier of if you took 10, 000 a year out of your, uh, tax credit. Tax deferred IRA and paid a premium for a grandchild. Um, let's say they were five and you paid a 10, 000 a year premium for 10 years.
Then you'd be done. You don't have to pay any more. So you paid a hundred thousand in premium. When that six, five year old grandchild was 65, there'd be over 4 million of tax free money. What if you had more, could you do more? Of course you can.
What if you converted 20, 000 a year for 10 years or total of 200, 000, that would be worth over 8 million. So it's a pretty, pretty straight line. Um, Calculation. If you did 20, 000 a year for 10 years on a five year old grandchild, And you quit paying after 10 years. In other words, you paid a total of 000 a year.
By the time that five year old grandchild is 65, there would be over 8 million of tax free money in their account. Now, again, your adult child is in charge. So, uh, at 50, that grandchild might 3. 5, 4 million. So you may not want them to have that much money. They may, or even at 40, they're going to have a, uh, maybe 3 million in there.
You may not want them to have that much money. So again, your adult child's going to be able to, say, wait a minute, you can't just lay around all your life and not work just, because you know, you're going to have three or 4 million when you're 45,
so we can structure that what's called a family incentive trust. To, uh, prevent that from happening, to prevent from having some more grandchildren. By the way, you don't have to buy this index universal life policy by using money from your IRA.
I'm just showing you the power of converting that taxable IRA that's going to get taxed , at a almost 50 percent rate when you die to your beneficiaries. Why let that happen? Why let that money go to the IRS? Take it out slowly over a number of years. That's it. And so it doesn't get added to your children's account all at once.
I can show you on paper how much more powerful this is than a standard Roth conversion. So if , you have a financial advisor that's pushing you to a Roth conversion, we have a better way, and I'd love to show you how it works.
But that is the, uh, grandchild's index, universal life tax free. Trust. And in my opinion, it far exceeds anything we could do. When we had stretch Iris, it is a much better way to built , tax free wealth for your family and not just for your grandchildren, but , your children will be able to use that as well.
And it will go on for multiple generations. They will remember you. I can guarantee that because of the legacy you've created for your family with such a small amount. Many people. Don't have that kind of legacy when they have millions of dollars in their state when they die, but you can create a multi million dollar Tax free legacy for your family with just a hundred or two hundred thousand dollars of investment By converting some or all of your individual retirement account.
Obviously the more you can afford to convert the bigger the legacy So that's it for the grandchild's tax free trust for this episode. And now for those of you who have listened to my podcast before, you know that every week I discuss a stock pick of the week, a stock that I like and why. And in this episode, I'm going to discuss a tech stock.
But before I do that, I do have to give you a disclaimer. , The stocks I discuss on my podcast or for entertainment and educational purposes only, I'm not making a recommendation to buy or sell. You should always do your own research before purchasing or selling any stock or stock options I discuss, and you should never rely upon anyone else's opinion, including mine.
Any losses you may incur if you purchase or sell stocks or options that are discussed on this program are your responsibility alone. And neither I read Scott tax free millionaires, Scott wealth advisors, or anyone affiliated with me or this program will be liable for your losses. If any, I very often own the investments I discuss on a program, and I could personally benefit if the market price of the stock increases.
However, I am not paid by anyone for mentioning a stock or company, and I'm not being paid a commissioner endorsement fee for discussing any stocks on this program. Okay. That was a mouthful, but with that out of the way, I want to discuss a stock that I'm sure you're familiar with now on the first seven episodes of my podcast, I've discussed some more esoteric stocks, some that maybe you hadn't heard of, but I'm sure you've heard of this one it's alphabet or Google.
And why I like it is because. Of the fact that it's been beaten down recently because the federal trade commission, uh, Lena Khan has gone after him and threatened to break them up. And that courts have threatened to, uh, make them go into small segments like they did with Microsoft. And that has affected the value of the company, even though they own 90 percent of the search market, they've also been beaten up because
google's own version of AI has had some problems. They have been a little too politically correct and people have gotten back some erroneous information. And even I've experienced that when I've used it myself. So I can attest to the fact that I believe Google's AI at the moment is not as far longer as perhaps not as.
It's a great tool for that. is user friendly. Some of the other versions, like Anthropics Claude or, OpenAI's, Chat GPT4. However, that being said, Google has a deep investment in DeepMind, one of the first AI companies, and they know what they're doing, and I believe they'll get it fixed.
But the thing that I really like about Google is their investment in, quantum computing. So if you've been following Google for some time, you may know that. Recently this week, they came out with an announcement about the willow chip, which is a quantum qubit chip, and they were able to process, uh, solve a problem in five minutes that would have taken a supercomputer 17 million years to solve.
Google. is one of the leaders in the quantum computing space. Before Willow, they had Sycamore, which is the infrastructure, and Willow is the chip. And they are making tremendous strides in this area. Now, quantum computing may be a few years off, or even a decade away from being practical.
And it's very hard to roll this out into these large, high performance data centers because the cooling systems are not there. They're going to have to have sub zero cooling systems to cool these chips down. Also, The precision that is required to build these, quantum chips is not there yet.
. Now, I mentioned on one of my earlier episodes that IonQ is a quantum computing company that doesn't use the traditional chips and doesn't need advanced deep cooling, , because they use laser in what are called trapped ion cylinders.
So they may make this leap before the traditional Willow chip. We don't know we're at the early stages, but either way, whether it's the silicon chip that drives quantum computing or trapped in cylinders with laser lights, quantum computing is coming. It is coming and it's going to be a major player. And we don't know who's going to be the leader, but there's room for more than one.
I believe there will be competitors in that space, just like there are in the AI space. And Google has made a major, investment in quantum computing. Quantum computing is necessary for the full development of artificial intelligence because artificial intelligence requires tremendous amount of data crunching.
And we're, we're hitting the wall with traditional silicone classical computing. And the next phase to allow artificial intelligence to go to where it's going to go is to quantum computing. And Google is one of the leaders. IBM, Google, IonQ, there are other companies out in that space. But Google is certainly a major player and I don't believe the market has captured the, the future value of that in their stock price.
Primarily because they've been beaten up with the FTC coming after him for, anti competitive behavior. Now, with the new incoming administration, Lena Khan is probably not going to be around much longer, so that may all go away.
But even if it doesn't, you saw what happened to Microsoft when they were forced to break up, didn't seem to hurt them too much, did it? And many people, many analysts think that Google broken up could even be worth more, right? But whether they're broken up or not broken up, I think they have tremendous value longterm and by longterm, I mean the next three to two to five years, the stock price today.
Uh, December 2024 is around 192 earlier this year. And I think in March it was 138. So even with all that's gone on, it's gone up a bit, but I still believe you have tremendous value in Google. It's a long term stock to buy and hold, add to your shares, dollar average into it, because I believe this is going to double in the next two to three years.
Easily, maybe more. It's a long term player in both the AI and the, , quantum computer space. And. In the search space as they get the Gemini issues worked out, which I believe they will. So, that's it for my first episode of 2025. We have talked about the Grandchild's Legacy Tax Free Trust. I think it's an incredible way to build wealth.
If you have grandchildren and you have tax deferred retirement accounts, and, you You don't really want to be forced to take the RMDs out of there But you have to at some point Then and even by the way Even if you're younger than fifty nine and a half and you have a lot of money in a taxable retirement account An IRA there are you don't have to pay the penalty to take the money out and put that into a child's trust or grandchild's Trust you can take that money out before fifty nine and a half without paying a penalty and that's called equal periodic payments.
So, like, again, that's another topic. We will not have time to get into this episode, but there is a way to take money out of an account without paying a penalty before 59 and a half if you wanted to structure something like this for your children or grandchildren. So perhaps that's a topic for another episode, but with that, that is this episode.
I hope you've enjoyed it and learned something. By the way, if you want to get on the list for getting a free copy of my book, tax free millionaires, where I talk about these techniques and also investing in the stock market inside your retirement accounts to get higher returns. I would love to get you a free copy of that book.
All you have to do to get that is join my free Facebook group at facebook. com. Forward slash groups forward slash tax free millionaires. So if you join that group, you can get on the list to get a free copy of tax free millionaires. Also, you'll be signed up to get the schedule of my podcast and my blog and be able to get this information on a regular basis.
So with that, I hope you've enjoyed this episode. I hope you'll tune in next week. We'll be talking about more tips for creating tax free wealth . Thanks and have a great week.
