Divorce Analysis Blog

Advanced Ideas About Divorce and Money

The Truth: Realities About Divorces Part4

Your standard of living will, most likely, drop, the question is: how much?:

Married couples realize economies of scale by sharing costs. Think about the valuable things married couples share: housing, cars, even cable TV. There are also intangibles such as child care time or time spent cleaning the house. Once you are separate, you will each need to pay for these necessities separately. In the absence of more income, these costs will comprise a larger slice of your combined income. Consequently you can expect at least less savings, and possibly, a reduction in your standard of living.


April 13, 2015 Posted by | divorce | Leave a comment

The Truth: Realities About Divorces Part 3

Since you will be selling all of your possessions, it is important to find the highest bidder:

At a basic level, the financial processes behind a divorce involve both parties valuing their assets and liabilities. We like to think of this process as equivalent to you selling everything you own (including debts!). The ultimate buyer could be a third party, your spouse, or maybe even yourself. However, the difference lies in the fact that all of your possessions will be marked to market. Mark to market is a finance expression that means you will realize any gains or losses in the value of your possessions. In other words, you will cash out of your holdings whether you are winning or losing.Divorce picture

April 1, 2015 Posted by | divorce | Leave a comment

The Truth: Realities About Divorces Part2

Your financial success or failure will, most likely, depend on your ability to negotiate with your former spouse:

Most divorces do not go to trial. Instead, divorce settlements normally result from negotiations that end when both parties feel they have reached a fair settlement. This process is no different, in principle, from the way you would negotiate for a new house or a new car. However, it is surprising that many never bother to consider basic negotiating principles as they head into their divorce.


March 25, 2015 Posted by | divorce | Leave a comment

The Truth: Realities About Divorces

In most divorces, a range of legal settlements is possible. It is worthwhile to understand the varying financial impact of different settlements:

Attorneys and legal counselors can help you understand your rights during a divorce. However, those going through a divorce often require additional financial planning that considers the consequences of various settlements. Can you really afford to keep your house even if you have a right to it? What does your divorce mean for your ability to achieve life goals like education and travel for you and your children. Your future is in your hands. With the best tools and knowledge, you can gain control of your financial future.House-divided

March 19, 2015 Posted by | divorce | Leave a comment

DivorceAnalysis: The Economics of the Tom Cruise-Katie Holmes Divorce

Tom Cruise is one of Hollywood’s leading actors with high profile leading roles in movies such as Risky Business, Top Gun, and Mission Impossible.  He has been nominated for three Academy Awards and Three Golden Globe Awards.  More recently, he has had less success in his marital life as his current wife; Katie Holmes left him taking their daughter along.  With this fame and success comes financial complexity.  While neither Tom Cruise nor his wife Katie Holmes is a current client of our Divorce Analysis, they typify the type of client we typically serve:  wealthy, successful with a financially complex community.  Like many divorces, the financial questions extend beyond the issue of dividing the assets in half.  On the table is an estimated $million dollars that one of them will lose and the other will gain. 



From the popular press, our understanding of the facts is as follows:


  • The length of the marriage was 6 years
  • There is one child
  • This child was moved from California to New York by the wife who then filed for a divorce claiming New York as the venue.
  • Wife claims to be asking for full custody of the child
  • The couple signed a California prenuptial agreement entitling her to $3 million per year of marriage ($18 million currently).


All of her actions serve to boost the amount of money she will get in the divorce.


Impact of change of venue:  $ 19 million


Divorce rules vary between counties so, in our experience, a prenuptial agreement drafted under California law would be of questionable applicability under New York law.  This is in part because California is a no fault state whereas New York is an equitable distribution state.  It is unclear that she has standing to file in New York.  The questions of standing will consider whether the couple has resided in New York for 6 months or more.  It is possible to have more than one venue for the divorce.  There is tremendous complexity beneath the differences and we are not lawyers qualified to opine on the difference.  However if she can change the venue and then get the California prenuptial agreement rejected, she stands to gain $19 million, tax free, as shown in the table below:


Possibility of rejecting prenuptial agreement which would open earnings during marriage to be split in two


Tom Cruise Earnings during Marriage to Katie Holmes


Movie                                                                          Earnings

Mission Impossible III                                                 $75MM

Lions for Lambs         

Valkyrie                                                                       $20MM

Tropic Thunder                                                           ?

Knight and Day                                                           $11mm

Mission Impossible Ghost Protocol                             $12.5mm

Rock of Ages                                                               $5mm

Total                                                                            $123.5 mm

After Tax  (40%:)                                                        $74 mm

This does not include profit sharing


The current prenuptial agreement promises $3million per year of marriage which totals $18million.


If she got half of the above earnings, which are lower than actual, she would be entitled to about $37 million or an increase of $19 million, a 100% increase!  This amount as property division would not be subject to tax.


Impact of custody


Child support (CS) is one area that would not be addressed in the pre-nuptial agreement.  The basic logic is that this type of support is for the benefit of the child who is not a party to the agreement.  That is why the Court might want to retain jurisdiction to determine the amounts (as opposed to letting the parents contractually agree on the amount outside of the view of the Court).  We often remind clients that child support and custody “never” end.  What we mean is that, no matter what arrangements are reached, as the child grows and develops, and the parents’ circumstances change, arrangements will need to be modified until the child turns 18 or becomes emancipated (12 years in the case of Suri Cruise).  For this reason, it would be wise for her to spend frugally on legal fees in this arena as she must save her money for years of litigation.  Which raises another question:  with so much money at stake, should Katie Holmes have a budget and even a “financial plan” for her divorce?  Absolutely!  We help individuals budget for a divorce and help them manage their legal team in a way that utilizes the legal spend in an efficient manner.


Tom Cruise Income:


While he obtains royalties and production credits, let’s assume he lives solely off the income from his retained earnings.  We estimate that Tom Cruise has earned $326 million before he married Katie Holmes.  Assuming he lost 60% of it to taxes and prior marriages, that still leaves him with $130 million.  Assuming he has this conservatively invested and he earns 4% per year on it, then his income would be $5,224,000 per year.  This is above and beyond the money he earned during his latest marriage.  The reason we don’t count that is that support is based upon income differentials AND custody %age differentials.  If we assume above that Katie Holmes gets half, then her income from that half would be equal to his which means only the $5.22 million would be up for division. 


We don’t know what the Court would decide but if child support PLUS spousal support was equivalent to 38% of this then he would owe Katie Holmes $165,000 per month in support for the next 12 years.  Interestingly, I would estimate that the child support component would be only about $30,000 or so of this total but it would be, once again, tax free.  If she got full custody, we can be sure that number would rise but I would expect only an additional $10,000 per month in difference for more custody.  At these wealth and income levels is it really worth the destruction to the family to gain a mere $120,000 annual advantage which is dwarfed by the $800,000 that Katie Holmes might earn on her separate property if she got a 4% return?  The legal fees for all of this fighting over custody threaten to overwhelm any financial impact.  So in strict financial terms, her attempt to change venue and file for full custody seem ill-advised.


So in short, Katie Holmes stands to gain a lot in property terms but very little in child support as a consequence of her maneuvers to change the divorce venue to New York City.  A zero sum game, whatever one loses the other wins.  Such issues highlight the value of getting expert knowledge on financial strategy during a divorce and this is exactly the type of guidance we provide at http://www.divorceanalysis.com

July 6, 2012 Posted by | divorce | Leave a comment

Divorce and insurance contracts: annuities in divorce settlements

We have always said that there are numerous ways to arrive at a 50/50 division of assets.  In the case of retirement plans, and more specifically, annuities, attorneys are often unaware of the potential to reduce their clients’ net worth by dividing the contract in half as this portion of an article in Investment News Magazine describes.  At Divorce Analysis, we are experts in advising clients about best ways to think about tax when dividing annuities and other retirement plans.

Breaking up is hard to do – especially with annuities

Attorneys often split contracts in divorce settlements, unaware of the potentially costly impact

By Darla Mercado

March 18, 2012

When a client came to his office bearing her new divorce decree, adviser Dale Russell became the bearer of bad news.

During the divorce proceedings, the couple’s lawyers decided that their chief financial asset, a $500,000 variable annuity inside one of their individual retirement accounts, was to be split among the two. But that Solomon-like decision was made without the attorneys’ awareness of its dire financial consequences.

Splitting the variable annuity meant that Mr. Russell’s client had to pay an 8% surrender charge and a 10% penalty for an early withdrawal from the IRA.

For Mr. Russell, vice president of Gallo & Russell Inc., the experience is hardly uncommon.

With nearly one in two marriages ending in divorce, financial advisers who deal with divorcing couples often face complex problems connected with untangling annuities that are in the pool of shared assets.

With divorce attorneys typically unaware of the nuances of annuity contracts and the various ways insurers treat contracts in the context of divorce, and with advisers typically out of the loop when settlements are hammered out, the problem lands in the lap of advisers.

“In the case of my client, there wasn’t much I could do in the way of alternatives,” said Mr. Russell, who hadn’t been consulted before the couple began preparing for the split.

“This was essentially the only asset they had, and instead of my client’s getting the $250,000 she expected, she’s getting almost $50,000 less,” he said.


March 20, 2012 Posted by | divorce | Leave a comment

The Best State To Get a Divorce Award Goes To:

New Hampshire! While no states require “fault”, some states make divorce easier and faster than others. At the top of the list rank our friends in the granite state. Interestingly, their next door neighbor Vermont is one of the toughest places to get a divorce.

From Bloomberg News:

Best and Worst States for Getting Divorced
By Joel Stonington and Alex McIntyre – Nov 11, 2011 Divorce is never easy — but in some states it is easier than others.

If Kim Kardashian and Kris Humphries lived in New Hampshire, their lives would be a little easier right now. The two ex-lovebirds were married for only 72 days before announcing they were filing for divorce. In New Hampshire they could have ended their marriage in far less time than that. How much less? Try less than a day. That’s because the Granite State is the easiest place to get unhitched in America, according to Bloomberg’s ranking of the easiest — and hardest — states in which to get divorced. All 50 states, and the District of Columbia, are analyzed and ranked.

The weather isn’t the only thing unpredictable about New England. New Hampshire’s next-door neighbor, Vermont, the liberal home of Ben & Jerry’s ice cream, is actually the toughest state in which to divorce. That state has a minimum processing time of more than a year, compared with a zero-day minimum in New Hampshire.

“When people come to me and say, let’s get divorced, I say, ‘Let’s do it in New Hampshire,’ because that’s the easier one,” said Cathryn Nunlist, a professor at Vermont Law School. Nunlist practices divorce law and lives near the border of Vermont and New Hampshire.

As with gay marriage laws, every state has different laws concerning divorce. Among the differences are such factors as state-mandated court filing fees, mandated separation periods, residency requirements, waiting periods after filing and minimum time requirements for completing the process.

How does your state stack up? To find out which are the “best” places to get divorced, Bloomberg Rankings weighed the above factors but did not take into account costly aspects of the divorce process, such as custody of minor children and the outside chance of a fault divorce.

Proving fault, for such things as infidelity, abandonment or idiocy, is no longer required for divorce in any state. In many states those laws remain on the books, though, making for interesting reading. In Pennsylvania, grounds for a fault divorce include “such indignities to the innocent and injured spouse as to render that spouse’s condition intolerable and life burdensome.”

“Fault divorce has really fallen into disuse,” said Harry Gruener, head of the Family Law Clinic at the University of Pittsburgh School of Law. “At least in Pennsylvania, you would have to look long and hard to find someone in the last 20 years who has brought a fault divorce.”

Southern states have some of the toughest divorce laws, while Western states tend to be lax. The filing fee for a divorce ranges from $50 in South Dakota to $409 in Florida. Even when both parties agree to the divorce, some states require a year or more of separation before even filing, and other states require six months or more of cooling-off time after filing. Pennsylvania, for example, requires a two-year cooling-off period if one party objects to the divorce.

One thing is clear: It’s easier to divorce than it was in the past, though much of the difficulty or ease remains up to the couple.

“People ask me, “How long will this take?’” said Gruener. “I ask them, ‘How stubborn are you?’”

November 11, 2011 Posted by | Community Property, divorce | Leave a comment

Divorce and Privacy in the Age of Facebook

One of the most remarkable changes to the divorce arena over the past few years is how social media tools such as Facebook and our paparazzi-obsessed society have been able to open doors into people’s private lives because of their divorce.

Notable examples include:

Jack Welch, CEO of General Electric: Based upon filings in his divorce case, he was challenged by GE shareholder activists for receiving unreasonably high compensation

Frank and Jamie McCourt, Owners of the LA Dodgers: Information found in divorce flings have jeopardized their ownership of the team

Barak Obama: He would likely not have won the Presidency had information about his opponents activity at swingers clubs not been publicized via a divorce filing in the Illinois Congressional contest.

From Wikipedia: Jack Ryan is a Republican from the state of Illinois who was forced to withdraw from the 2004 United States Senate race due to an alleged sex scandal involving his relationship with his ex-wife, actress Jeri Ryan.[1][2] His eventual replacement, Alan Keyes, would go on to lose the general election to State Senator and future President of the United States, Barack Obama.

Individuals often lose their well guarded privacy as a consequence of the divorce process. The question many of my clients ask me pertains to how they can maintain their family’s privacy and not end up with the social and financial shocks that happen because of the way others view their marriages and lifestyles.

The core of the problem rests with the fact that a divorce is a lawsuit which takes place within the legal system. The public has a constitutionally-guarded automatic right to see all documentation filed with the courts. This public airing of dirty laundry is especially risky in a divorce situation because your court filings will center around 2 major areas: children and how you raise them and money – internal processes that most families keep private. In these 2 areas, divorce requires DEEP disclosure of all the intricate details of a parent’s finances and behavior. Adding to this is the fact that your actions within the divorce process are also publicly available. For example, how would your employer view it if you were sent to jail for contempt of court because of something filed by your ex wife?

So who can obtain this information about your family life, lifestyle and financial affairs?

• General public curiosity: Neighbors and others who simply want to gossip or sell your story.

• Business/Political associates and foes: Mark Rich, the famed financier pardoned by Bill Clinton, was actually revealed via his divorce from his wife Denise. In fact Barak Obama might even owe his presidency to information disclosed in Gov. Ryans divorce which led him to drop out of the race (in which he was the most popular candidate in the history of Illinois), leaving his young opponent Barak Obama to win the seat in Congress!

• Your former spouse: postings on facebook, myspace and dating sites have often been used in arguments that one parent or the other was either unfaithful or was derelict in their parental duties.

So what can be done to increase your level of privacy?

1) Consider a new venue: often switching the filing location can isolate the divorce from a curious public
2) Ask the court to seal sensitive records.
3) Hire a private judge
4) Use a collaborative or mediated process.

At Divorce Analysis we apply all of the above and more to help clients protect their privacy.

August 18, 2011 Posted by | Alimony, California Divorce, Child Support Calculation, Community Property, divorce, Prenuptial Agreement, Uncategorized | , , , , , , , , | Leave a comment

How Divorce Attorneys Make Money

Last year in California there were roughly 150,000 divorces. There were also an estimated 15,000 divorce attorneys resulting in 10 divorces per attorney. If the average divorce cost $1,000 then the average divorce attorney makes $10,000 per year. They must be moonlighting as actors. Or perhaps the actors are moonlighting as divorce attorneys. Either way, it is a cut throat compeititve business in which it is very hard to differentiate.

In the area of differentiation, ie, who is a good attorney and who is not: clients are interested in factors such as: litigation skill, negotiation ability, win rate, and customer service levels. Unfortunately none of these is measured or disclosed by attorneys. Certainly there is no consumer reports rating of divorce lawyers. So ultimately they all offer the same set of skills: they finished law school and they passed the bar. That’s it.

Clients often tell me that an attorney was “recommended” or was a “good attorney” but never has a client been able to tell me a good reason why the attorney was recommended. Perhaps another person used them and was happy with their performance however my clients divorce is almost always completely different so there’s no saying the attorney would perform just as well under a different set of circumstances and with a different spouse as their foe. There is also an information asymmetry: if you’ve never been divorced before how do you know if your attorney did a good job?

Perhaps the attorney settled the case. Is this necessarily better than if they had litigated it? Not if you got a bad settlement. Perhaps they were “friendly”. Once again this does not get you the best settlement or the most money. But it is what we at Divorce Analysis are concerned with.

How many attorneys have I met with for an initial consultation who say “I KNOW the judge so they will rule in my favor” or “I know the law better than the judge so they will have to agree with me”. The subtle implication is that our justice system is biased towards certain attorneys or that the system is incompetent – I hardly believe the judges would agree with these statements. I will be the first to acknowledge the shortcomings of the courts however it doesn’t inure to the favor of one attorney.

A note about incentives.

So how do these divorce attorney/actors make their $10,000? A few cases in point and the incentives they create.

Case #1: I don’t have any money and my husband does
In this case, the attorney might get you to sign a motion allowing your husband to “advance” the money directly to them. You go to court and the judge orders the spouse to advance the estimated attorneys fees. This usually comes with the stipulation that this money will be deducted from your future settlement.

The incentives created in this situation are:

1. The payor for the service (the husband) has no connection to the delivery of the service
2. There is no recourse if the service is not delivered
3. Once the attorney is paid (and I know about trust accounts, we will address these later), their incentive is to do as little work for you as possible.
4. Even if they do the work, there is no incentive to produce a quality product.

But this never happens right?

The problem is that this money will eventually come out of your pocket. However since it didn’t come out initially, the attorney will behave as if the money is theirs and not yours. Normally when we pay for a service we are able to ask for estimates and pay once the service is done satisfactorily. In this case, the attorney gets paid and has no incentive to pursue any of YOUR objectives. Ironically, you come last in order of priority behind the court, your spouse and the attorney’s interests.

Case #2: Give me a big retainer and I will take care of your case

In the San Francisco Bay Area, divorce attorney’s $500 (for a run of the mill attorney) to $1,000 (for a run of the mill attorney who will return your calls). In most of these cases, they will ask for a retainer between $15,000 and $50,000. Let’s think about the incentives this creates.

1. Service delivered is not specified in advance. Imagine giving a car mechanic $10,000 and asking them to return whatever is left over after they finish working on your car. How much of that $10,000 do you think you’ll see?
2. High retainer blocks you from switching attorneys mid stream in case they don’t deliver. Why? Because it will be hard to get your retainer back (see #1).
3. Incentive to bill low quality minutes. What is a low quality minute? One spent on administrative tasks, filing, etc. These minutes cost as much as time in court litigating! Why would I do the hard work of litigating when I can bill you for reading a book about the law?

Case #3: The retainer trust fund

Once an attorney receives large retainers whether from you or from your spouse, they are supposed to place them in a trust fund with your name on it and bill that trust fund whenever they have an invoice. At the same time, they are supposed to deliver an accounting that includes your retainer balance and the location of your money. Unfortunately many attorneys bill the retainer and place in their personal bank accounts never to be seen again.

Case #4: Divorce Analysis Clients

Our clients control and minimize their legal bills while getting good results– the right way to pay for a divorce. They align the incentives of the attorney with the goals in their case. They have goals in their case because we work very hard on developing these before the client even meets with the divorce attorney. In this way, incentives are aligned and our clients realize VALUE for their dollars spent. Want to learn more? Get in touch with us!

April 25, 2011 Posted by | divorce | 1 Comment

Divorce realities #1: Divorce lowers standards of living

Over the next few days and weeks, I will post some “divorce realities”.  These are simple facts that I have learned from working in many high net worth divorce cases.  While they are simple and short, they are powerful in that they apply to most situations.
Divorce Reality #1:  Your standard of living will, most likely, drop, the only question is: how much?

Married couples share costs for big items such as rent/mortgage, cars, even cable TV. There are also intangibles such as child care time or time spent cleaning the house. Once couples separate, each party will need to pay for these necessities separately, ie on their own. In the absence of more income, these costs will comprise a larger slice of each person’s income.

Consequently after a divorce, one should plan for higher costs, and, if living on half (or less) of the previous income, should consider budget cutting measures. Others do well with increasing their earnings by retraining or re-educating themselves.

Some people derive hope from laws saying that divorcees have a “right” to live at their prior standard of living. In fact these laws are themselves divorced from the economic reality that this “right” is impossible for both parties to make into “reality”. The true “reality” is in fact, exactly the opposite.

March 15, 2011 Posted by | Alimony, California Divorce, Child Support Calculation, Community Property, divorce, Uncategorized | Leave a comment