SpaceX Deal Lines Up $3 Billion in Tax Savings for EchoStar CEO

A splashy deal with SpaceX has helped send shares of telecommunications company EchoStar Corp. soaring more than 375% since early August, boosting the net worth of co-founder Charlie Ergen to $20.1 billion.

But the surge is also having a subtler, second-order effect on the former professional poker player's fortune: Ergen stands to gain through his use of a niche estate-planning tool that may allow him to pass along more than $7.5 billion in stock to his heirs tax-free.

After a years-long slump, EchoStar -- the operator of Boost Mobile and satellite TV provider Dish -- got a jolt last year after agreeing to sell some of its spectrum licenses to Elon Musk's SpaceX in exchange for up to 40 million shares in the privately held space company.

EchoStar's shares have continued to rise in value as investors treat the stock as a proxy for SpaceX ahead of the rocket company's planned initial public offering. The timing couldn't be better for Ergen, 73, who's been preparing for just this scenario through his use of grantor retained annuity trusts, or GRATs, a tax loophole opened up a quarter century ago that lawmakers never closed.

About half of Ergen's EchoStar stake -- currently worth about $9 billion -- is held in five of these specialized trusts, which allow individuals to pass assets to their heirs without paying the federal estate and gift tax rate of as much as 40%.

The catch? GRATs only confer tax benefits if the assets they hold appreciate in value during their term, usually a two-year period. That hasn't always worked out for Ergen in the past. He set up dozens of GRATs as EchoStar's stock generally flatlined through much of the 2010s, resulting in relatively few tax advantages.

Last year's SpaceX deal is handing Ergen the inheritance jackpot he's been waiting for. Not only has EchoStar's stock gain boosted his net worth more than threefold, according to the Bloomberg Billionaires Index, but his heirs are positioned to save about $3 billion in taxes at the top rate of 40%, according to a Bloomberg analysis.

EchoStar declined to comment, while attorneys at law firm GF&R, one of whose founding partners previously managed Ergen's GRATs, didn't respond to voicemails and emailed requests for comment.

Walton Decision

GRATs became a popular estate-planning tool for wealthy individuals following a 1990 tax law change, but it was a 2000 federal court ruling that entrenched their acceptance. The so-called Walton decision, named for a GRAT set up by the sister-in-law of Walmart Inc. founder Sam Walton, affirmed that assets transferred to an heir through a GRAT were exempt from federal gift tax.

"Once you had that Walton case, it's hard to put the genie back in the bottle," said Bridget Crawford, a law professor at Pace University and former partner at Milbank LLP.

GRATs are typically structured on a two-year timeline, with the creator receiving yearly annuities that roughly add up to the initial value of the asset invested, plus a premium set by the Internal Revenue Service. For the past few years, that premium has been close to 5%.

If the value of the asset stalls or decreases over the two-year term, there's no real risk for the GRAT holder because they get the full asset back in the form of those annuity payouts. But if the investment performs well enough to exceed the IRS-dictated premium, any excess gains can be transferred to the holder's heirs without having to pay a federal gift tax.

"It's kind of a heads-I-win, tails-you-lose situation," said Mitchell Gans, a Hofstra University law professor who specializes in estate and gift tax. "There's all upside, and low downside."

Since 2005, Ergen has shuffled his shares in EchoStar and Dish, which formerly traded as a separate company, through at least 58 separate GRATs, according to a Bloomberg analysis.

Most have been unsuccessful, with 35 having failed and returned all their shares to Ergen, who in many cases simply put them back into new GRATs, starting the process over. Eighteen of the 58 have done well enough to pay out leftover shares for the benefit of Ergen's family members -- roughly $2.4 billion worth based on the date they were transferred.

Five of Ergen's GRATs are still active, holding more than 72 million shares currently worth about $9 billion -- more than five times as much as when he set up the vehicles. The GRATs expire on various dates starting next month through July 2027.

"He held out hope for hitting it big, and now it's working out for him," said Beth Shapiro Kaufman, a partner at Lowenstein Sandler and former legislative counsel at the Treasury Department's Office of Tax Policy.

Turnaround Artist

As recently as June, EchoStar was weighing a bankruptcy filing, battling a regulatory probe and complaints from creditors who accused the Englewood, Colorado-based company of shifting corporate assets into subsidiaries that were out of their reach.

Following an Oval Office meeting in June with President Donald Trump, Ergen agreed to offload spectrum to AT&T Inc. and SpaceX, sending EchoStar's stock soaring. The shares have continued to notch record highs in the months since as investors look ahead to SpaceX's planned IPO later this year.

Further gains in EchoStar's shares would only add to Ergen's tax savings.

"We've made our bet, and that's with SpaceX and Starlink," Ergen said in a March earnings callBloomberg Terminal. "I don't think any amount of valuation is probably crazy there."