At Frame & Frame Attorneys at Law, we work with individuals and families every day to build estate plans that protect what matters most. While most people understand the importance of a will or trust, fewer realize how capital gains tax can impact the assets they pass on to loved ones. Whether you’re preparing for retirement, managing a family home, or thinking about your children’s future, understanding the relationship between capital gains tax and your estate is key to making smart, informed decisions.

We’ll break down what capital gains tax is, how it applies to estate planning, and what Maryland residents should consider when trying to minimize tax burdens for their heirs.

What Is Capital Gains Tax?

Capital gains tax is a tax on the profit made from selling a capital asset, such as real estate, stocks, or other investments, when the sale price exceeds the asset’s original purchase price. These profits are categorized as either:

• Short-term capital gains, which apply to assets held for one year or less, are taxed at your ordinary income tax rate.

• Long-term capital gains, which apply to assets held for more than a year and are taxed at lower rates (0%, 15%, or 20% depending on income).

When you sell an asset during your lifetime, you’re generally responsible for paying capital gains tax on the profit. However, what happens to those taxes when an asset is inherited?

How Capital Gains Apply to Inherited Assets

When someone passes away and leaves an asset to a beneficiary, the IRS provides what’s called a “step-up in basis”. This means the asset’s value is adjusted to its fair market value on the date of death, rather than its original purchase price.

Let’s say your father bought a home in Annapolis for $100,000 in the 1980s, and it’s worth $500,000 when he passes away. If you inherit the property and later sell it for $520,000, your capital gains tax would be based on a $20,000 gain, not the $420,000 difference from the original purchase price.

This step-up in basis can greatly reduce or even eliminate capital gains tax liability for heirs, if the estate is structured properly.

What Happens If You Gift Property Before Death?

Many well-meaning parents choose to gift their homes or investment properties to their children before death to avoid probate. However, this can backfire from a tax perspective.

When you gift an asset during your lifetime, the recipient inherits your original cost basis. Using the example above, if you gift your $100,000 home to your child while you’re alive, and they later sell it for $520,000, they could owe tax on a $420,000 gain. That’s a major difference in tax liability—one that could have been avoided with strategic estate planning.

Capital Gains Tax vs. Estate Tax in Maryland

It’s important to distinguish capital gains tax from estate tax, as they’re often confused.

• Estate tax is based on the total value of your estate at the time of death and is paid by the estate itself.

• Capital gains tax is paid by individuals when they sell an asset that has appreciated.

As of 2025, Maryland’s estate tax exemption is $5 million, meaning estates valued below this amount are not subject to state estate tax. However, even if you don’t owe estate tax, your heirs could still face capital gains tax if your assets are not structured properly.

Common Assets That Trigger Capital Gains Tax

Capital gains tax most often applies to the following types of assets:

• Real estate (primary residences, vacation homes, rental properties)

• Stocks and mutual funds

• Cryptocurrency

• Art, antiques, and collectibles

• Businesses or business interests

Each of these assets may be subject to different rules depending on how they are titled, transferred, or sold. That’s why it’s critical to consult with an experienced estate planning attorney who can analyze your full asset portfolio and design a strategy that minimizes risk.

The Role of Trusts in Managing Capital Gains

A well-structured trust can help you avoid probate, preserve privacy, and manage capital gains exposure. Here’s how different types of trusts impact capital gains tax:

Revocable Living Trusts

• Assets in a revocable trust are still considered part of your estate for tax purposes.

• Beneficiaries receive a step-up in basis at death.

• Useful for probate avoidance and asset management during incapacity.

Irrevocable Trusts

• May remove assets from your taxable estate.

• However, depending on how the trust is structured, it could eliminate the step-up in basis, meaning beneficiaries may face larger capital gains taxes when they sell the asset.

• Must be drafted with care and reviewed regularly.

Charitable Remainder Trusts (CRTs)

• Allow you to donate assets to charity while retaining income during your lifetime.

• Can reduce or eliminate capital gains tax when appreciated assets are sold inside the trust.

• Ideal for high-value assets like real estate or stocks with low cost basis.

When to Sell and How It Impacts Taxes

Timing can make a big difference. If you’re considering selling appreciated assets:

• Before death: You’ll be responsible for capital gains on the full appreciation.

• After death: Your beneficiaries will benefit from a step-up in basis and owe less (or nothing) in capital gains tax.

This is one reason why it’s often better to hold onto appreciated assets until death, rather than liquidating them during life.

Maryland-Specific Considerations

At Frame & Frame, we serve clients throughout Maryland, where state laws and tax implications may differ from federal rules. Some key local considerations include:

• Maryland does not have a capital gains tax of its own, but gains are included in your Maryland income tax return.

• Maryland also has a real property transfer tax, which may apply when selling real estate.

• Titling real estate jointly or placing it into certain trusts can affect the application of both state and federal taxes.

Understanding the interplay between federal and Maryland-specific rules is essential for developing a tax-smart estate plan.

Strategies to Reduce Capital Gains Exposure

Here are some ways Maryland residents can plan ahead:

• Utilize the primary residence exclusion: You can exclude up to $250,000 ($500,000 for married couples) of capital gains on the sale of your primary residence if you meet certain requirements.

• Establish a revocable living trust: This can help avoid probate and allow your heirs to receive the full step-up in basis.

• Consider holding assets until death: Especially if you’ve experienced significant appreciation.

• Donate appreciated assets to charity: You may avoid capital gains tax entirely while receiving a charitable deduction.

• Create a grantor trust or charitable remainder trust: For high-value assets.

Why Proactive Planning Matters

Capital gains tax is often overlooked in estate planning conversations, but it can have a significant financial impact on your heirs. Whether you own a modest family home or a diverse portfolio of investments, a thoughtful strategy can help reduce taxes and ensure a smoother transfer of wealth.

At Frame & Frame, we help families across Maryland protect their assets, preserve their legacy, and minimize tax exposure through smart planning. With decades of experience in estate planning, probate, elder law, and asset protection, our attorneys are ready to guide you every step of the way.

Get Personalized Guidance from Frame & Frame Attorneys at Law

Every family’s financial picture is different—and so is every estate plan. That’s why we don’t offer one-size-fits-all solutions. Instead, we take the time to understand your goals, your assets, and your legacy. Whether you’re just getting started with estate planning or reviewing your existing plan due to new tax laws or life changes, our team can help you navigate the complexities of capital gains tax, estate tax, and everything in between.

Schedule your consultation today to learn how we can help you protect your assets and provide for your loved ones with confidence. Contact us now or call our office to get started with a personalized estate planning consultation.