If you are like me, then you receive lots of invitations to donate to your favorite charities. There are natural disaster funds, religious contributions, education, health, and many other non-profit groups that look to individuals for funding. According to the Giving USA Foundation, individuals gave an estimated $211.77 billion in 2010, a 2.7% increase from 2009. Since this is an important topic to many people, it is good to be informed on the most effective ways to give to your favorite charities.

One common way to contribute to charities is to give cash. This is simple, and charities can easily handle the different contribution levels. The downside is that you may have to sell an asset (stock, bond, mutual fund) in order to free up the cash you intend to donate. Usually, when you sell something, there are tax consequences to doing so. For example, if you had a stock worth $10,000 and the basis was $5,000, you would create a tax consequence by selling and would likely have less than the full $10,000 to give to the charity.

One easy way around that is to give the stock directly to the charity. You could potentially avoid paying capital gains tax and presumably could deduct the full $10,000.

However, because your chosen charity might not be set up to accept stock directly, another great solution is to use a Donor-Advised Fund as a convenient, low cost, tax-efficient way to support charities with a flexible grant making process.

After you open a Donor-Advised Fund account with a tax deductible contribution of cash and/or stock, you can instruct the fund to make a donation immediately or you may choose to let the money grow tax-free in different investment options available through the fund. You can specify one or more charities to receive the money later. You can also name one or more people to continue to make decisions about your account if you are deceased or otherwise unable to do so.

Two popular Donor-Advised Funds are the Schwab Charitable Fund and the Vanguard Charitable Endowment Program. The Schwab fund has an account minimum of $5,000, an additional contribution minimum of $500, and a minimum grant size of $100. The Vanguard program has a higher initial contribution minimum of $25,000 and a minimum grant size of $500.

Overall, a Donor-Advised Fund may be a great way to contribute to your favorite charities in a tax-efficient manner. Please make sure to consult with a qualified tax professional to determine if this method is appropriate for your specific situation.

Here are some additional resources to help you learn more about this topic:

Schwab Charitable Fund

Vanguard Charitable Endowment Program

IRS Publication 526, Charitable Contributions