You are correct.
Nothing really can be done to a 10 bolt or 12 bolt rear to make it hold up to 38s, that's just a hopeless mis-match. Leave the front axle open, get the alloy shafts and good u-joints and it'll live for a while (if not forever if you don't totally thrash it).
A 14 FF would be your best choice for the rear, obviously.
If you're talking about 8" of suspension lift you've opened up a whole new can of worms with the short wheelbase of a K5.
Keep in mind that a TH 350 and NP 208 in stock form are not the strongest setup you can get, but the TH 350 can be built up to handle damn near anything. The 208 will probably survive for at least a while. Other transfer cases are available too.