Matrimonial law is derived from judicial decisions (i.e., “caselaw”) and statutes. As well intentioned and precise as those statutes and the caselaw interpreting them, are and can be, the fact remains that how matrimonial courts apply the law is by and large case specific.
This is a long-winded way of saying that because each matrimonial case tends to depend upon its own unique set of facts, courts are often compelled to reexamine and reevaluate the legislative intent underlying the statutory framework otherwise known as the Domestic Relations Law (the “DRL”).
That brings us to Justice Edmund M. Dane’s recent decision in LKF v. MTF, 2024 NY Slip OP 24312 (Sup. Ct., Nassau Cty. 12/9/2024), which addresses the “novel issue” of “how to classify a 529 account under the Automatic Orders” and “whether or not a party’s post-commencement withdrawal of money from a 529 account to pay their own counsel fees violates” the Automatic Orders.
Preliminarily, as the decision explains, a “529 Account is a type of investment account that someone can use for higher education savings (emphasis added).” See www.nysaves.org. In general terms, inter alia, the Automatic Orders, codified at Section 236 of the DRL, prohibit transfers/withdrawals/sales/encumbrances of various assets while a divorce action is pending absent written consent of the parties or a court order.
Notably for purposes of this discussion, with regard to the restraint on the transfer of assets such as real estate, personal property, cash accounts, stocks, mutual funds, bank accounts, cars, and boats, there is a carve out for transfers made “in the usual course of business, for customary and usual household expenses or for reasonable attorney’s fees” in connection with the divorce action.
That carve out does not, however, apply to transfers relating to “tax deferred funds, stocks or other assets held in any individual retirement accounts, 401K accounts, profit sharing plans, Keogh accounts, or any other pension or retirement account.”
Returning to the facts of LKF, the plaintiff-wife brought a motion to hold the defendant-husband in contempt for violating the Automatic Orders, restrain him from making further withdrawals from 529 college accounts set up for the parties’ three children, direct him to return the funds already withdrawn from the 529 accounts, and for an award of counsel fees.
The wife argued that the 529 accounts were opened “to save for the future education of the children,” and that her husband withdrew $150,000 from one of such accounts.
The husband argued that his withdrawal of $150,000 from a 529 account was permissible under the above mentioned carve-out in the Automatic Orders “as it was for counsel fees relating to this divorce action,” his appeal of an order issued in the divorce action from April 2024, and “in defense of a federal lawsuit” commenced against him. He further argued that he had outstanding legal fees of $150,000, and defended against a “relentless stream of frivolous litigation, initiated and sustained by the Plaintiff, her parents, and her business entities understood to be controlled by her and her extended family.”
In contrast to the wife, the husband claimed that “it was understood that the children’s UTMA accounts—which had a combined balance of $758,000 – would be more than sufficient to cover the children’s college expenses.”
As the decision states, the husband “effectively wants this court to treat the subject 529 account as a regular cash or savings account” to, in effect, take advantage of the carve-out in the Automatic Orders for reasonable attorney’s fees.
Relying upon descriptions of 529 accounts as set forth on the website www.nysaves.org, the website for the Office of the New York State Comptroller (www.osc.ny.gov/savings), the website for the Internal Revenue Service (www.irs.gov/newsroom/529-plans-questions-and-answers), and prior caselaw characterizing 529 accounts, the Court concluded as follows:
Given that a 529 account can be used as an investment vehicle with tax benefits for higher education savings, and since earnings can grow federally tax-deferred, it is a perfectly reasonable and logical interpretation of the text of the Automatic Orders to conclude that a 529 account is a tax-deferred asset and therefore should be treated under DRL § 236(B)(2)(b)(2), which, proscribes withdrawals therefrom (absent court order or written consent) for any purpose. The Legislature, when adopting DRL § 236(B)(2)(b)(2), clearly did not include tax deferred funds in DRL § 236(B)(2)(b)(1), which section permits such withdrawals for reasonable counsel fees. Therefore, this Court cannot conclude that the Legislature intended to permit matrimonial litigants to be able to withdraw monies from tax-deferred 529 account[s] to pay their reasonable counsel fees during the pendency of a matrimonial action (emphasis in original).
Notably, the carve-out in the Automatic orders for reasonable attorney’s fees applies to the divorce action in question, i.e., the husband would have had no authority to use funds to prosecute an appeal in the “Appellate Division, Second Department” (the April 2024 Order), or to defend “a separate federal court action in another Court, to wit: Federal Court, of which the Plaintiff herself is not a named party thereto” (emphasis in original).
Further, while the husband appended invoices from his divorce counsel and from his counsel in the federal court action, “his papers” were “barren of actual proof that the $150,000.00 was actually paid to those attorneys.”
While the court declined to invoke the “drastic remedy of contempt,” the husband was directed to replenish the monies withdrawn. Additionally, “practically speaking, it is this court’s opinion that accounts which parties have agreed should be earmarked for the education of their children should not be liquidated during a matrimonial action to underwrite litigation costs. That would set a dangerous precedent.”
The moral of the story, which should not be surprising, is that unilaterally withdrawing funds from 529 accounts to pay for non-education related expenses while a divorce action is pending is a risk not worth taking. How the automatic orders are interpreted in the context of the many actions a litigant can take during a divorce action is a story that continues to evolve. Stay tuned.
"529 Accounts Are Not Your Divorce Piggybank," by Alan R. Feigenbaum, was published in the New York Law Journal on January 10, 2025.
Reprinted with permission from the January 10, 2025, edition of the New York Law Journal © 2025 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited.
