Image: Baby with money © Creatas, Photolibrary

Sometimes Congress hands out a break that is so generous it seems it must be a mistake. This one's a doozy: The ability to receive a totally tax-free inheritance of $400 million or more.

Thanks to two recent changes in the tax code, investors with huge 401k accounts now have a way to turn them into completely tax-free income for their grandchildren's lifetimes.

This is by far the biggest estate-planning break on record, created even as lawmakers debate over which tax giveaways should be killed to help shore up the federal budget.

"I call this tax break the government's going-out-of-business sale," says individual retirement account guru Ed Slott, who travels the country teaching advisers and accountants how to squeeze benefits out of the Roth IRA. "This is a tax break you could drive 10 Mack trucks through. It's an incredible opportunity to do a totally tax-free transfer of wealth."

This massive estate-tax break was created last year in two steps. First, Congress lifted a $100,000 income restriction on who can convert a 401k or IRA to a Roth IRA, allowing even the wealthiest investors to convert. Then, late in the year, it raised the generation-skipping transfer tax exemption to $5 million until 2013. The GST exemption was previously $3.5 million and was scheduled to drop to $1 million this year before Congress stepped in.

Both of these provisions on their own create possibilities for significant tax savings, upon conversion. But used in combination, the results are exponentially greater.

The Roth IRA has always been on a different playing field compared with alternatives, because it allows gains to be withdrawn tax-free. Money taken out of a 401k, regular IRA or other retirement accounts is subject to income tax rates. Also, the Roth doesn't require that minimum distributions be taken after you turn 70½, as other plans do. So if you don't need retirement plan assets to live on, the Roth preserves it best for heirs.

Not everyone jumps at the chance to convert to a Roth IRA, because you have to pay income taxes on the assets moved into the account. So if you plan to live off of retirement account assets, a conversion may not make sense. But from an estate-planning perspective, when there are decades of gains ahead, the tax bill can be a small price to pay for big benefits down the road.

With the new GST exemption, the estate-planning benefits that can be wrung out of a Roth are eye-popping. Consider an extreme case: A wealthy individual converts a large 401k account to a Roth IRA and names a grandchild as the beneficiary. The grandchild, at age 1, inherits the Roth, whose assets have grown to $5 million. Because of the new $5 million GST exemption, the Roth assets would not be subject to estate tax or generation-skipping transfer tax.

Under Roth rules, an heir must take required minimum distributions, but the distributions can be stretched over a lifetime, and assets left in the Roth can continue to grow tax-free. Based on a 1-year-old's 81.6-year life expectancy and assuming an average annual return of 8%, Slott calculates that the grandchild's lifetime income from the Roth would be $408 million -- "completely free of estate, gift, income and capital gains taxes," he says.

If both grandparents left a big Roth account to the same grandchild, the tax-free inheritance would be almost twice that amount, depending on the age of the grandchild when the second Roth is inherited.