IRS Treatment of the Hindi Undivided Family ("HUF")

Oct 15, 2017

In this post, the FBAR Wiz will explore how the IRS is likely to categorize the unique investment vehicle known as a Hindi Undivided Family, Hindu Undivided Family, or HUF. A Hindi Undivided Family is a special feature of Hindu society consisting of a common ancestor and all of that common ancestor's lineal descendants together with their respective spouses and unmarried children. As a result of recent amendments to the 1956 Hindu Succession Act, a Hindi Undivided Family includes all family members who are Hindus by religion, such as sons and daughters whether married or unmarried. The 'Karta' is the term given to the manager of the family in this setting. Traditionally, the Karta was the most senior male, though females may also serve as the Karta. The Karta has the authority to transfer for value the joint family property, if such transfer is made for legal necessity or for the benefit of the family like, for instance, payment of debts for a family business. The Hindi Undivided Family may pay valid remuneration to the Karta under a valid bona fide agreement for the benefit of the family. Only joint property can fund a HUF. Joint family property includes: (1) ancestral property; (2) property from a partition of a larger Hindi Undivided Family; (3) property acquired using Hindi Undivided Family assets; and (4) separate property that is contributed by a member (although the Indian tax benefits of a HUF do not apply to separate property). Ancestral property includes any property received by a Hindu male from his father, paternal grandfather, or paternal great-grandfather. If a Hindu male dies intestate, then the share received by his son is impressed with the character of Hindi Undivided Family property in the son's hands. So, the wife and children of the son will also have a per capita share in that part of the property. If property is received as a gift or pursuant to a Will with a clear direction that it is to be made to the Hindi Undivided Family, then it will be so regarded. U.S. Tax Treatment of the Hindi Undivided Family First off,  you should consult a professional to assist you in making the determination of how your HUF will be treated for U.S. income tax purposes. Applying United States (i.e., IRS) tax methodology to the institution of the Hindi Undivided Family provides an interesting example of the analytical challenges in a global economy in which one must cross not only boundaries between nations, but boundaries of time and tradition as well. A fundamental question for determining the United States (i.e., IRS) tax consequences of a Hindi Undivided Family is whether a Hindi Undivided Family will be treated as a separate entity or whether it would be analogized to a grantor trust under which the person who controls the property (the Karta) would be considered the owner of the property for U.S. income tax purposes. Most likely, the IRS will treat a Hindi Undivided Family as a separate entity since the Karta cannot be a donor to a Hindi Undivided Family and the role of the Karta bears very strong resemblance to the fiduciary responsibilities of a trustee. Most of the U.S. tax rules that cause a trust to be disregarded (see Sections 673-677 and 679 of the Internal Revenue Code, the IRC) apply to the person who is the source or donor of the property to the trust, and therefore by definition, do not apply to the Karta because the Karta can never be the donor of Hindi Undivided Family property for which the Karta is responsible. However, under IRS § 678, if a beneficiary of a trust has the right to vest in himself or herself principal or income of a trust, he or she would be treated as the "owner" of the property for U.S. income tax purposes. You may also be interested in reading more on the filing obligations likely to affect those with offshore assets and/or offshore accounts in this related blog post about the FBAR Form and Form 8938. To check out whether you have an obligation to report offshore accounts/assets, and what forms you need to file, check out the free FBAR Wiz app.