If I had to guess and only a guess I'd say its the front clutch pack. Fluid smelling bad like burnt smell its a toasty clutch pack. Were there any metal shavings in the fluid?
"-1988 Red Hilux Standard frame, X-tra cab, locked F&R, 5.29's, 35" tires and a SAS. In Moab
"-1988, 1999 3.4L, Supercharged, 2.1" URD pulley, URD 7th injector, 2 1/2" Magnaflow exhaust, TO DO: lift, locker.
"Did you know the IFS was designed by Hitler himself to make the life of 4WD owners tough? Yeah, it's true, he saw a vision of the Devil and he told him to do it." -DaveInDenver