Donating appreciated securities
If you have appreciated stock or mutual funds in your taxable account, you will have to pay capital-gains tax if you sell them. However, by donating appreciated securities directly to a charity you can forgo paying tax as long as you have held the securities for more than one year. (The deduction is limited to 30% of your adjusted gross income for most charities, rather than the usual 50% limit; consult your tax advisor or see IRS Publication 526, Charitable Contributions for details.)
Donating securities at Vanguard
To make such a contribution with Vanguard, use the Giving Fund Shares to Organizations form. Fill out the start of the form yourself and have the charity fill out the rest of the form. If the charity does not want to hold Vanguard funds, one of the options on the form allows the charity to redeem the shares and receive a check.
If you are using specific identification of shares for tax purposes, you need to identify which shares are being donated in the same way; send Vanguard a secure E-mail, or enclose a letter with the form, which says, "Please donate $10,000 (or 123.456 shares) from the shares purchased on 1/2/04." Since you pay no tax on the gains, you would want to donate your lowest-basis shares.
The benefit of this type of donation is equal to the value of the tax deduction. If you donate $10,000 worth of a mutual fund and you paid $5,000 for the shares, you avoid a $5,000 long-term gain, saving $750 at the 15% tax rate. The charity, since it is tax-exempt, can sell the shares itself and pay no tax.
Note that if you have shares with a loss, you should not donate them to charity; instead, you should sell them, claiming the capital loss which will reduce your taxable income, and then donate the sale proceeds to the charity.
You cannot deduct the charitable contribution until the securities are transferred from your account, which requires the charity to fill out paperwork and send it to Vanguard. Therefore, if you want to get a deduction on this year's taxes, don't make the contribution very late in the year. (In contrast, if you mail a check on December 31, it is deductible this year even if the charity deposits the check in January.)