Can you turn $10,000 into $20 million? It is possible. All it takes is the power of tax-deferred compounding - and lots of time.

If you are a grandparent looking for a way to make a one-time gift with real impact, consider funding retirement for your grandchild. Make a gift of $12,000 (or less) to an irrevocable trust for your grandchild's benefit, and have his or her parents act as trustees. They in turn invest the money in a variable annuity, a hybrid insurance/mutual-fund vehicle that allows tax-deferred compounding.

To ensure the money is used for retirement, set up the trust so that your grandchild can not touch any of it until he or she is 65 years old (or whatever their retirement age will be). This also allows the trustees to shoot for long-term growth. Calculating an 11% compounded return, the trust could be worth over $10 million when the grandchild turns 65. The trust can be set up to allow the grandchild to receive 7% of the trust's assets each year after 65, which will make the first check about $700,000, equivalent to $102,500 in today's dollars on a 3% annual inflation rate. If the grandchild receives a yearly check for 20 years (and if the assets continue to grow at 11%), the trust will still be worth about $23 million when the grandchild turns 85. You can also set up the trust to control what happens to the remaining assets upon the grandchild's death.

If this idea appeals to you, talk to a knowledgeable attorney. It could a few thousand dollars to set up the trust, but could guarantee a secure retirement for your grandchild.