“Unified Managed Household”, or UMH, or sometimes just “householding”, are different names for the tax-efficient joint management of a group of accounts to a common target asset allocation. Doing householding well is complex, and doing it manually is economically infeasible for all but ultra-high net worth accounts. The good news here is that you no longer need to worry about it. 

We’ll take care of it for you. 

Here’s the problem we’re solving: suppose a family has two taxable accounts and three tax-advantaged (“qualified”) accounts, and you’d like all five accounts, when viewed as a whole, to adhere to a single target asset allocation. You could easily accomplish this by just having each account adhere to the target asset allocation. But this is likely to be tax inefficient, perhaps disastrously so. Imagine that a qualified account is underweighted in US equities and a taxable account is correspondingly overweighted. If you just make each account a sort of “mini me” copy of the household-level target asset allocation, you’ll have to sell equities in the taxable account. If those holdings have low basis, you’ll incur a wholly unnecessary tax liability (at a household-level, you had the right amount of equities, so there was no reason to trade in the first place). 

The better approach is to:

• coordinate trades across accounts to avoid reducing exposure to an asset class in one account and simultaneously increasing it in another.
• minimize the tax effect of sales by preferentially realizing losses in taxable accounts and gains in tax-advantaged accounts.
  

And this is exactly what we do. Every day, we compare the combined holdings of the accounts in a household to the household-level target asset allocation. If there’s an imbalance, we try to correct it by making sales in whatever accounts minimize taxable capital gains. That means first selling in a taxable account if that generates a loss, then selling in qualified accounts, and finally, selling in whatever taxable accounts generate the least taxable gains. At the same time, we’ll make sure we obey account-level restrictions on asset-class drift and product choices (e.g. only buy muni-bonds in the taxable accounts; only buy Vanguard funds in the Roth IRA). And we’ll make sure that we don’t create wash sales across accounts.

Of course, all this is on top of our standard account-level tax optimization, which includes year-round tax-loss harvesting, optimal tax-lot selection, risk-sensitive gains deferral, tax-optimized cash withdrawals, wash-sale avoidance, and (if desired) tax and gains budgets. 

We also let you document to your clients the amount of taxes you save or defer for them through active household-level tax management. This is in addition to the taxes you save or defer through account-level tax optimization (which, for most accounts, is likely to be larger than your advisory fees¹).

Jointly managing a household’s accounts in a tax-optimized manner is not a new problem, but we’re seeing a rising interest in doing it reliably and well, part of a larger industry trend towards delivering better tax management. The good news is that technology greatly simplifies tax management, so much so that it is economically feasible to deliver expert levels of tax management – including householding – to all clients, of all sizes. (We at Smartleaf Asset Management rely on the automated rebalancing technology of, well, our parent, Smartleaf).

Questions? Comments? Want to learn more? Drop us a line. You can email us at questions@smartleafam.com.

1. Based on a study by our parent, Smartleaf.