Legislative appropriations that are deceptively marketed as trusts: The sagas of the Federal Social Security Trust Fund and South Carolina’s Education Scholarship Trust Fund

Many of my JDSUPRA postings, a full catalog of which may be found below, are about the doctrinal incoherence that is being inflicted on the institution of the trust by legislative intrusions into equity doctrine, intrusions such as the Uniform Trust Code. The theme of this posting is the legislative fiscal machination that entails a misappropriation of the trust label, another example of legislative malpractice in the trust space, although in this case the legislative malpractice is deception-based rather than incompetence-based. There are many examples of legislative misappropriation of the trust label. We have the Leaking Underground Storage Tank Trust Fund, the Violent Crime Reduction Trust Fund, and the Highway Trust Fund, all of which are trusts in name only. The focus of this posting is on the so-called Federal Social Security Trust Fund and South Carolina’s so-called Education Scholarship Trust Fund (ESTF). Each has the “veneer” of a trust; neither, however, is a “true” trust; and in each case, the absence of true-trust status has been confirmed judicially in no uncertain terms. The Federal Social Security Trust Fund is not a true trust. This has been confirmed by two U.S. Supreme Court decisions. See generally my July 8, 2011 JDSUPRA posting: https://www.jdsupra.com/legalnews/social-security-legally-is-just-a-govern-31751/. Or flip to sub-sub section 9.9.3 of Loring and Rounds: A Trustee’s Handbook (The heading of sub-section 9.9 is “False Trusts”). Neither is South Carolina’s Education Scholarship Trust Fund (ESTF) a true trust. See Eidson v. South Carolina Department of Education, 906 S.E.2d 345 (S.C. 2024), a case in which the Supreme Court of South Carolina was called upon to adjudicate whether the ESTF is a true trust, and if it is whether its enforcement would violate South Carolina’s Constitution. It is most likely not a true trust; but even if it were, its enforcement would be unconstitutional in that ESTF is funded with public monies. The ESTF enabling legislation provides that ESTF scholarships may be used for private school tuition. Article XI, Section 4 of the South Carolina Constitution provides that “no money shall be paid from public funds nor shall the credit of the State or any of its political subdivisions be used for the direct benefit of any religious or other private educational institution.” The court was “skeptical” that the ESTF was a true trust. The enabling legislation had failed to designate a trustee. “When examining the actual mechanics of the ESTF, it most resembles a government budget allocation tool, where public funds are earmarked for specific government spending projects and therefore ‘trusts’ in name only.” The Federal Social Security Trust Fund is such a legislative “budget allocation tool.” In principle may a South Carolina legislature “deploy a trust to avoid constitutional limits on the use of public funds”? Would a private educational institution be only indirectly benefited by an ESTF scholarship award if title to the scholarship funds passes from the State of South Carolina to a trustee-intermediary, and from the trustee-intermediary to the institution, but only at the “sole and explicit direction” of the pupil’s parent? The majority determined that the institution would still be directly benefited in substance by the ESTF scholarship, though not necessarily in form. As an aside, under general principles of equity an ESTF-type trust might well be constructively void ab initio as the legislature’s purpose in employing a trustee intermediary is to neuter a constitutional proscription. See generally §6.2.12 of Loring and Rounds: A Trustee’s Handbook (2025), reproduced in the appendix below.