Shelby and Peggy Bagala applied to Merrill Lynch Life Insurance Company, a predecessor in interest of Transamerica Life Insurance Company, for an annuity contract on July 18, 2003. The application named Mr. Bagala the annuity’s owner and did not designate a co-owner. Nonetheless, Ms. Bagala signed her name in a box labeled “Co-Owner’s signature,” while Mr. Bagala signed as the owner.
The annuity’s initial premium was $1,354,232.56. The Bagalas funded this premium by exchanging five pre-existing annuity contracts pursuant to 28 U.S.C. § 1035, which permits an insurance company’s client to exchange an annuity for another annuity issued by the company without subjecting any income attributable to the replaced annuity to tax obligations.
To effect these transactions, the Bagalas executed five “Request for 1035 Exchange” forms, one for each of the annuity contracts that would be used to purchase the new annuity. Each form listed Mr. Bagala as the owner of the annuity being exchanged, and the co-owner was listed as “N/A.” Mr. Bagala signed each form as the owner, and Ms. Bagala signed in a box labeled “Co-owner’s signature or Spouse (if community property state).”
The Bagalas’ financial advisor, William McCrery, later described the annuity purchase in a deposition. Mr. McCrery testified that he and a Merrill Lynch insurance and estate planning specialist discussed the annuity at length with Mr. and Ms. Bagala. According to Mr. McCrery, the Bagalas decided to omit Ms. Bagala from the annuity for tax planning purposes. Specifically, Mr. McCrery stated:
As a tax planning strategy, we wanted these [death benefit] dollars to go outside of the estate upon the death of Shelby…. The reason the children were named in this contract and not Peggy is because we were trying to avoid the inheritance tax.
When asked whether Ms. Bagala could have understood these discussions to mean that she would be a co-owner, Mr. McCrery responded:
I don’t think she could have gotten that understanding based on the way we spoke. Clearly the four children were the only beneficiaries on the contract….
On July 30, 2003, Merrill Lynch issued the annuity contract. It identified Mr. Bagala as the only owner and annuitant. It also listed the four Bagala children as Mr. Bagala’s beneficiaries and provided that each would receive any death benefit payable under the policy in equal measure.
Ms. Bagala was not named as a co-owner, co-annuitant, or beneficiary.
Merrill Lynch sent Mr. Bagala regular correspondence about the annuity contract. For instance, shortly after Merrill Lynch issued the contract, it provided Mr. Bagala with an “Annuity Summary.” This document identified Mr. Bagala as the owner and the Bagala children as his beneficiaries.
Over time, Mr. Bagala contributed over $500,000 in additional premiums to the annuity. For each contribution, Merrill Lynch provided Mr. Bagala a “Confirmation of Activity” form. Merrill Lynch also sent Mr. Bagala quarterly financial statements. Like the application, the contract, and the “Annuity Summary,” the correspondence that Mr. Bagala received consistently identified him as the owner and the four Bagala children as his beneficiaries.
Mr. Bagala apparently never sought to add Ms. Bagala as a co-owner or to make any other change to the annuity contract.
Mr. Bagala died on January 14, 2014. On August 22, 2014, Ms. Bagala notified Transamerica of a purported “clerical error” in the annuity contract and argued that she was entitled to all death benefit proceeds.
In response, Transamerica filed an interpleader lawsuit, naming Ms. Bagala and each of the four Bagala children as potential parties in interest. Transamerica deposited the proceeds with the registry of the court and was dismissed, leaving Ms. Bagala and the Bagala children as the only parties to the lawsuit.
Each of the Bagala children filed an answer and a claim, alleging that under the express terms of the annuity contract, each was entitled to one-quarter of the death benefit proceeds.