Yeah, I've never left Edit Town. Basically, let's call my current active household Smith. So I'm playing under Jane Smith right now. And in Edit Town in Jane's game I created a new Sim we'll call Joan. So after creating and saving Joan as her own household, I clicked on Joan's little picture frame and then clicked on Jane's house (I'm still under Jane's game) and then clicked Merge With. And nothing happened, so I clicked the green house icon again and got the pop-up error that households couldn't be merged.
Now, I gave them both the same last name. Could that be the problem?