Introducing SAM Householding

“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 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: you’d like all accounts in a household, when viewed as a whole, to follow a household-level target asset allocation. You could easily accomplish this by just having each account individually follow a “mini me” copy of the target asset allocation. But this is likely to be tax inefficient, perhaps disastrously so. You could, for example, find yourself selling an asset class in a taxable account, incurring realized capital gains, even though at the household level, the asset class is underweighted. 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 qualified (tax-advantaged) accounts.

Some examples:

• Simple: suppose a qualified account is underweighted in US equities and a taxable account is correspondingly overweighted, with low basis stock. What’s the right thing to do? Leave well enough alone. At the household-level, you have the right amount of equities (in contrast, managing each account to a “mini me” copy would result in needless trading and realized taxable gains). 
• A little more complex: suppose you have one qualified account and two taxable accounts in your household. All three accounts hold mid cap stocks. In the first taxable accounts, there’s a large mid-cap position with low basis. In the second taxable account, there’s a small position with a small unrealized loss. The combined holdings are overweighted in mid-cap stocks and underweighted in large caps. What’s the right way to fix this? First, sell mid-cap holdings at a loss in the second taxable account. If that’s not sufficient to solve the problem, sell mid-cap holdings in the qualified account. If that’s still not sufficient, then – and only then – sell mid-caps at a gain in the first taxable account.

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. 

One last thing. 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). This is big. Really big. It’s obviously good to do well for your clients. But, you know what’s better than doing well for your clients? Doing well for your clients and being able to prove it.

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.