IRC Section 2038 addresses revocable transfers, where a person transfers property but retains the power to alter, amend, revoke, or terminate the transfer. If, at death, the decedent holds a power that could change who benefits or reclaim the property, Section 2038 generally causes inclusion of that property in their taxable estate. This rule is central to revocable living trusts, which are excellent tools for probate avoidance and management but do not avoid estate tax. In the life insurance world, Section 2038 warns planners that if an insured retains too much power over a trust or entity that owns a policy, the policy's value could still be drawn into their estate. Section 2038 interacts with Sections 2036 and 2037 to capture transfers where the taxpayer tried to move assets out of the estate while keeping substantive control, reinforcing the principle that estate tax savings usually require giving up true ownership and control.

In everyday planning, advisors see IRC Section 2038 whenever clients want maximum flexibility over transferred assets. Clients may favor revocable living trusts so they can amend beneficiaries, change trustees, or reclaim assets at any time. Advisors explain that while these trusts streamline administration, the assets remain fully includible in the estate under Section 2038. More delicate planning arises when clients want similar control over irrevocable trusts used for life insurance or estate tax reduction. If an insured retains broad powers to change beneficiaries, direct distributions, or unwind the trust, those powers can trigger 2038 inclusion and undo the tax benefits. Advisors coordinate with attorneys to carefully draft limited powers, independent trustee discretion, and mechanisms such as trust protectors that provide flexibility without creating general powers in the hands of the insured. Periodic trust reviews help ensure that subsequent changes, such as naming the insured as co-trustee, do not inadvertently create 2038 issues around valuable life insurance and investment assets.