Divorce Analysis Blog

Advanced Ideas About Divorce and Money

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