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Retirement Planning > Retirement Investing > Annuity Investing

Children entitled to annuity proceeds, not widow, Louisiana court determines

By Steven A. Meyerowitz

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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.

Ms. Bagala also filed an answer and a claim, in which she alleged that the written contract’s ownership designation was erroneous. Ms. Bagala contended that she co-owned the annuity because she had signed the annuity application as a co-owner and because the Bagalas had used community property to fund the initial premium. Citing a contractual provision that provided that “the beneficiary of the co-owner spouse must be the surviving spouse,” Ms. Bagala contended that, as Mr. Bagala’s widow, she was the rightful beneficiary and was entitled to the entire death benefit.

Three of the Bagala children moved for summary judgment.

The Annuity Contract

The annuity contract provided:

On the death of an Owner prior to the Annuity Date, we will pay to the beneficiary the death benefit representing the entire interest in the Contract.

The annuity contract also provided:

OWNERSHIP OF A CONTRACT: Unless another Owner is named by the purchaser, the purchaser is the Owner. Upon notice to us you may assign the Contract to a new Owner. The assignment terminates all prior beneficiary designations. A new Owner’s age must be less than 85 years. Only spouses may be co-owners. The beneficiary of the co-owner spouse must be the surviving spouse. The age of the oldest co-owner must be less than 85 years. Ownership rights must be exercised by the co-owners jointly. Co-owners are deemed to be joint tenants with right of survivorship unless they indicate otherwise.

The Court’s Decision

The court granted the childrens’ motion.

In its decision, the court explained that the contract identified Mr. Bagala as the policy’s only owner and annuitant; the four Bagala children as the only beneficiaries; and each of the Bagala children as entitled to an equal share of any death benefit payable under the agreement.

Moreover, the court continued, the contract did “not identify [Ms.] Bagala as a co-owner, co-annuitant, or beneficiary” and did not even name her “anywhere in the agreement.”

In the court’s view, the annuity contract, therefore, was clear: Mr. Bagala was the owner and the Bagala children were his beneficiaries. Thus, it held, the Bagala children were entitled to the disputed death benefit proceeds.

The court rejected Ms. Bagala’s argument that the “OWNERSHIP OF A CONTRACT” provision meant that she co-owned the annuity contract because she was Mr. Bagala’s spouse. The court found that that provision did not mandate that spouses be co-owners or purport to alter or displace the ownership and beneficiary designations that were set forth elsewhere in the contract. Instead, the court declared, it provided “a set of generally applicable rules” that limited who could be designated a co-owner and explained how co-owners should exercise their governance rights. Because the contract indicated that Mr. Bagala was the annuity’s only owner, this provision had “no bearing” in this case, the court found.

The court also was not persuaded that Ms. Bagala was a co-owner or “co-purchaser” because the Bagalas allegedly funded the annuity’s initial premium using community property assets, explaining that she provided “no evidence that the 1035 exchanges that funded the initial premium involved the expenditure of community funds” and that, in any event, under applicable Louisiana law, the Bagala children, as the named beneficiaries, owned the proceeds “regardless of how the initial annuity premium was funded.”

Finally, the court decided that even if the Bagalas had used community assets to purchase the annuity and she was a co-purchaser, Mr. Bagala was the sole owner as the annuity expressly named him as the only owner.

The case is Transamerica Life Ins. Co. v. Bagala, No. 14-2738 (E.D. La. Dec. 29, 2015). 

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