square peg1.jpgEntering open-court oral stipulations of settlement to a divorce action is treacherous.  It’s easy to miss something or be imprecise in language.

However, striking the deal while the iron is hot is a necessary part of matrimonial litigation.  Letting the parties walk out of the courthouse without putting the day’s agreement “on the record” may cost the parties their deal.  Emotions, particularly in divorce cases, often cause second (and hundredth) thoughts on settlement provisions.  Giving friends and family one more opportunity for input may likely undermine the day’s efforts.

However, there are reasons that the typical written settlement stipulation consumes scores of pages. The boilerplate and legalese so offensive to the public is the necessary consequence of the thousands of decisions which interpret the words found in or missing from decades of previous settlements or otherwise requiring attention in any final agreement.  Moreover, without reflecting on the written word, it’s easy just to miss things.

Take the recent Second Department decision in Zuchowski v. Zuchowski.  The parties’ oral in-court stipulation announced that “all joint bank accounts have been split to the mutual satisfaction of the parties and here and forward each party shall keep any bank accounts in their respective names . . .”

The stipulation also provided that “each party is responsible to pay the 50/50 share of college” for their children, but “the children shall avail themselves of every possible loan, grant or any other moneys offered to them by the college before the parties are respectfully [sic] required to contribute towards the education of the children.”

The settlement made no mention of a “529” education savings plan which the wife owned and on which the parties’ son was designated beneficiary.

Internal Revenue Code §529 introduced qualified tuition programs. Contributions to these state-regulated or administered accounts are allowed to grow income tax-deferred.  Funds can be withdrawn without penalty or recognition of income if used for qualified educational expenses.  If the 529 plan is qualified for New York (Education Law §§695 et seq.), the contributor/account owner may deduct from his/her federal adjusted gross income up to $5000 ($10,000 for joint filers) in contributions to the account during the year (Tax Law § 612[c][32]).

However, beyond these tax benefits, 529 Plans have a feature very important to many parents. With the 529 Plan, the contributor, not the beneficiary, is the owner. Custodial accounts are the property of the beneficiary, and to the extent not already used for the benefit of the child, the balance must be turned over to the beneficiary on his/her 21st birthday. The 529 Plan is the property of the contributor, and “unqualified” withdrawals can be made. The account need not be used for educational expenses or to benefit the child, at all.

In Zuchowski, the wife was the owner of the 529 Plan.  Although not covered by the parties’ settlement stipulation, the husband wanted to receive quarterly statements on the account. He also wanted it to be required that the account be exhausted paying for college expenses of the parties’ son before either party would have to contribute to such expense.

In the lower court, Supreme Court Justice William Kent initially granted that relief, but vacated his own order on reconsideration. The Appellate Division reversed, reinstating the requirement that the husband receive quarterly statements, and that the account be used up before the parents paid any portion of their agreed-upon shares of college expenses.

Certainly, giving the parties’ words their ordinary meaning, the 529 Plans was not one of their “bank accounts” covered by their in-court stipulation. On the other hand, a 529 Plan does not fall within the categories of “loan, grant or other moneys offered to them by the college” which were to be deducted before the parents were obligated to pay their 50% shares of college expenses.

The import of this decision should not be merely whether Appellate Division did the right thing when it reversed Justice Kent’s reconsidered order. Rather, the appellate court tells us that it reached its decision by interpreting the open-court oral stipulation using traditional “principles of contract construction and interpretation.” The Court, itself, tells us that it gave “fair meaning to all of the language employed by the parties to reach a practical interpretation of the expressions of the parties so that their reasonable expectations will be realized.”

However, the stipulation as reported to us did not cover the 529 Plan at all.  It was missed.  The appellate court agreed 529 Plan was not a “bank account,” holding:

there is nothing in the stipulation to support a finding that the parties intended the monetary assets they were allocating between themselves to include Peter’s college fund. Although the former wife was technically the owner of the funds in the 529 Plan, the reason for that account’s existence was not to personally benefit either of the parties, but to fund Peter’s college education.”

The Court, thus, changed the nature of the 529 Plan.  It decided for the parties that it must be used for the son’s college expenses, contrary to one of the Plan’s most valuable characteristics.  In effect, the account was transferred to the son.  Moreover, the Court decided for the parties that it must be used first.  It cannot be spread over the college career, or used for law school. It cannot be accessed if needed for day-to-day living.

Had the court wanted to reach a contrary result and leave the account with the wife, it could simply have pointed out that the parties could have, but chose not to list the 529 plan as one of those items which would deducted before “the parties are respectfully [sic] required to contribute towards the education of the children.” The parties could have, but chose not to mention the account at all.  Its ownership remained unaffected by the parties’ stipulation.

The 529 Plan, here, is an asset never mentioned, and one which at the least would have been covered within the broad strokes of boilerplate catch-all provisions. That lapse, alone, could have been a sufficient basis to grant relief. If necessary, a hearing could have been held to determine whether the parties intended to omit the 529 Plan from the stipulation’s provisions.

Instead, in order to reach its result, the Appellate Division changed the nature of the 529 asset.  That’s now the precedent.  529 Plans will be looked at differently in divorces.