The gross estate includes the value of any interest in property transferred by decedent during lifetime, if the enjoyment of the interest was subject to any change through the exercise of a power by the donor to alter, amend, revoke or terminate, which power was in effect as of the date of the donor's death or had been relinquished by him within three years prior to his death.
The underlying rationale for inclusion of the transferred property in the gross estate is based upon the fact that the decedent actually retained control over the ultimate beneficial enjoyment of the property transferred. A transfer of property which is subject to revocation and reclaiming by the transferor is not considered a completed transfer. Note that the transferor need not actually exercise his power to alter, amend, revoke or terminate; he need only possess any such power in order for the property to be includable in his gross estate.
A prominent example of this type of transfer is the revocable inter-vivos trust (popularly referred to as "living trust"). Such trusts are often used for the transfer of title of property in order to remove such property from eventual probate proceedings. However, a "living trust" will not remove the trust property from the gross estate for federal estate tax purposes as long as the grantor retains the right to revoke it.
In addition to the property owned outright at the date of death the gross estate for federal estate tax purposes includes certain other property with which the decedent was connected, as discussed in the following blog posts:
Revocable Transfers - I.R.C. §2038