Charitable Gift Annuities Are 0n The Rise

Move over, charitable trusts. Make way for the charitable gift annuity.

Typically viewed as entry-level gifting methods thanks to low minimum contribution amounts, low cost, and simplicity, charitable gift annuities have had a spike in inflows from wealthy donors lately. According to a BNY Mellon Wealth Management study, in 2019, assets in gift annuities were up 21% over the prior year, and the average gift was 56% larger. Assets continued to flow into charitable trusts, but at only a slightly higher level than in 2018.

The surge in popularity in gift annuities is likely a result of people’s desire for a guaranteed lifetime annuity at a time when yields are at historic lows in the fixed-income market, and a hesitation to sock money into a charitable remainder annuity trust (CRAT).

A CRAT is the gift annuity’s equivalent in the trust world, and typically a popular tool. But ultralow interest rates and high valuations in the stock market make for a lousy environment for CRATs, says Crystal Thompkins, national director of gift planning services at BNY Mellon Wealth Management, who expects gift annuities’ popularity to extend through this year.

As winds shift in the economy, the markets, and regulatory environment, it’s not uncommon for the popularity of different charitable planning tools to rise and fall. Given the surge in popularity of gift annuities, it’s worth a look at how they size up these days relative to their closest charitable trust cousin.

Charitable Gift Annuities

A charitable gift annuity is a simple contract guaranteeing that if you give a nonprofit organisation a lump sum, it will pay you a fixed, lifetime annuity based on actuarial factors—a host of market factors combined with your life expectancy. Minimum donations are around $2,000 and, unlike a trust, no attorney is required to set one up (hence no attorney fees).

Even if you live beyond your life expectancy, after your lump-sum equivalent has been paid out, you continue to receive the annuity. Depending on the contract, the annuity can continue to pay out to a surviving spouse. If you and your spouse die before your lump sum has been paid out, the charity keeps the balance in its coffers.

Payments can be deferred, which increases the amount paid out in the future annuity. A partial donation for the gift can be taken upfront. Capital gains taxes on the growth of underlying assets are spread over the annuity payments. When interest rates are low, the future capital gains’ bite out of annuity payments is lower, leaving more intact as income, Thompkins says.

Nonprofit groups that offer charitable annuities have large infrastructures, such as museums and universities. “We’re talking those with hundreds of millions in assets that are segregated to support their annuity programs,” Thompkins says. “These are diverse pools designed to absorb potential risk. It’s like managing a pension.”

The downside is that not all nonprofits offer gift annuities, and they aren’t customised, says Pam Lucina, chief fiduciary officer at Northern Trust.

Charitable Remainder Trusts

In contrast, trusts can pay out to a number of different charities, over a specified period of time instead of a lifetime, and can be used to transfer assets to heirs. The CRAT is the most similar to a gift annuity: It turns a lump sum into an annuity, and what’s left at the end goes to charity—at least 10% of assets transferred to the trust is required to be left as a gift.

But the CRAT has lost its luster lately, Thompkins says. The annuity and future gift are dependent on the high probability of the underlying invested assets performing within certain parameters. With stock market valuations high, and the economy in ragged shape due to Covid-19, there’s good reason for concern that the market could enter a sustained bear market.

“In 2008 and 2009, there were trusts that were exhausted with no benefit to either the charity or the donor,” Thompkins says. “Many people are leery now.”

Apple has dominated the electronics supply chain for years. No more.

Artificial-intelligence companies are writing huge checks for chips, memory, specialised glass fibre and more, and they have begun to out-duel Apple in the race to secure components.

Suppliers accustomed to catering to Apple’s every whim are gaining the leverage to demand that the iPhone maker pay more.

Apple’s normally generous profit margins will face pressure this year, analysts say, and consumers could eventually feel the hit.

Chief Executive Tim Cook mentioned the problem in a Thursday earnings call, saying Apple was seeing constraints in its chip supplies and that memory prices were increasing significantly.

Those comments appeared to weigh on Apple shares, which traded flat despite blowout iPhone sales and record company profit.

“Apple is getting squeezed for sure,” said Sravan Kundojjala, who analyses the industry for research firm SemiAnalysis.

AI chip leader Nvidia recently became the largest customer of Taiwan Semiconductor Manufacturing , or TSMC, Nvidia Chief Executive Jensen Huang said on a podcast.

Apple had been TSMC’s biggest customer by a wide margin for years. TSMC is the world’s leading manufacturer of advanced chips for AI servers, smartphones and other computing devices.

Spokesmen for Apple and TSMC declined to comment.

The big computers that handle AI tasks don’t look like the smartphones consumers own, but many companies supply components for both. In particular, memory chips are in short supply as companies such as OpenAI, Alphabet’s Google, Meta , Microsoft and others collectively spend hundreds of billions of dollars to build AI computing capacity.

“The rate of increase in the price of memory is unprecedented,” said Mike Howard , an analyst for research firm TechInsights.

That applies both to the flash memory chips that store photos and videos, called NAND, as well as the memory used to run apps quickly, called DRAM.

By the end of this year, the price of DRAM will quadruple from 2023 levels, and NAND will more than triple, estimates TechInsights.

Howard estimates that Apple could pay $57 more for the two types of memory that go into the base-model iPhone 18 due this fall compared with the base model iPhone 17 currently on sale. For a device that retails for $799, that would be a big hit to profit margins.

Apple’s purchasing power and expertise in designing advanced electronics long made it an unrivaled Goliath among the Asian companies that make most of the iPhone’s parts and assemble the device.

Apple spends billions of dollars a year on NAND, for instance, according to people familiar with the figures, likely making it the single biggest buyer globally. Suppliers flocked to win Apple’s business, hoping to leverage its know-how and prestige to attract other customers.

These days, however, “the companies now pushing the boundaries of human‑scale engineering are the ones like Nvidia,” said Ming-chi Kuo, an analyst with TF International Securities.

Demand for AI hardware is poised to keep growing rapidly. Apple’s spending growth is modest in comparison with what is being spent to fill up AI data centers, even though it is breaking records with huge sales of the iPhone 17.

Samsung Electronics and SK Hynix are raising the price of a type of DRAM chip for Apple, according to people familiar with Apple’s supply chain.

Big AI companies pay generously and are willing to lock in supply and make upfront payments, giving the South Korean chip makers leverage against the iPhone maker.

Apple signs long-term contracts for memory, but it has used its heft to squeeze suppliers.

Its contracts have empowered it to negotiate prices as often as weekly, and to even refuse to buy any memory from a supplier if Apple didn’t view the price as favorable, according to people familiar with its memory purchases.

To boost leverage with suppliers, Apple even began stocking more inventory of memory. That was atypical for Cook, who normally cuts inventory to the bone to maximize Apple’s cash flow.

Apple is fighting not only for current deliveries but also for the attention of engineers at suppliers.

Glass scientists who worked on developing the smoothest and lightest smartphone displays are now also spending time on specialised glass for packaging advanced AI processing chips, according to industry executives.

Makers of sensors and other gizmos inside the iPhone are winning new business from AI companies such as OpenAI that are developing their own hardware.

Still, suppliers said they were far from giving up on business with Apple. Working with Apple is a form of education, they said, because it remains one of the most demanding and disciplined customers in the industry.

TSMC, the Taiwanese chip manufacturer, has built successive generations of its most advanced chips with Apple as its lead customer, relying on the big predictable demand for iPhones.

Now that TSMC is doing more business with Nvidia and other AI companies, people with knowledge of the chip supply chain said Apple was exploring whether some lower-end processors could be made by someone other than TSMC.

One of Apple’s biggest profit-spinners is selling extra memory for far more than the memory chips cost the company.

Last fall Apple discontinued the iPhone Pro model with 128 gigabytes of storage.

Customers who want that model must now start at 256 gigabytes and pay $100 more—the type of move that could be repeated this year to help Apple offset higher costs, wrote Craig Moffett, an analyst at Moffett Nathanson, in an investor note.

However, Apple isn’t expected to raise the price of its next iPhone models over similarly equipped iPhone 17s, said Kuo, the analyst.

News Corp, owner of The Wall Street Journal, has a commercial agreement to supply news through Apple services.

Charitable Gift Annuities Are 0n The Rise

Parts for iPhones to cost more owing to surging demand from AI companies.