It can be done, but the main flaw I see is mixing reef with fish tank. Over time, you are going to spend much efford in keeping the nitrate in the reef low enough if you have the fish only tank attach to it. This issue is further acerbated by the W/D filter. It is better to separate the system into a fish only and a reef/refugium instead.
I agree with taikonaut, there are some possible issues with nitrates down the road.
Also, how do you plan to keep the water levels between the two tanks? (I see an overflow from the 120 feeds the 'fuge which then pumps up to the reef, which looks like it overflows into the 120, but it's not entirely clear to me how the levels are maintained..)
Ok, Thanks for the advice, I won't connect the 120 to the forty, Do you think i should ditch the W/D all together and make refugium for both tanks, and if this is the case, is there a general rule for size of refugium to tank or load size?
If you split 'em, I don't see why you'd need to worry too much about ditching the W/D... The main concern with the W/D is that it doesn't complete the nitrogen cycle well and leaves you building up nitrates.. - Just do at least periodic water changes and you should be fine.
I'd be curious if there's a "rule of thumb" on 'fuge sizes too....
I agree with GD. In fact, you can keep the W/D on the FO tank, and use the saltwater from water tank of the reef tank for water change for the FO tank since it is still very good for FO tank's standard. (Do I sounds like a cheapskate :?)
Anyway, on the fuge size... it really depends on the preference. The larger the fuge, the larger the capacity of *pods and more stable it is. I see some very small fuge (~2-5 gal) for a 40 gal tank, but I guess it is like everything else in the hobby.... get the largest one you can manage.