1991 Jeep YJ Rust in engine

My daughter has a 1991 Jeep YJ Wrangler. It is and always has been a California vehicle. We purchased it from the original owner and he used it as a tow vehicle behind his motor home. Since he owned a car dealership the car was maintained excellently. Even though the odometer showed 80,000 at the time of purchase he had documentation that 50,000 of those miles were from being towed. It now has 100,000 miles showing equating to 50,000 miles of actual driving. It has always run great, but lately it has been overheating. We took it into a mechanic who said the water pump was going out, but the bigger issue is he said the engine itself is full of rust. He said he recommends putting the new water pump on it and then selling it immediately because the rust issue is going to lead to further damage with the other components of the engine. Is there a way to deal with this interior engine rust problem? What would cause the engine to do this in the first place? My daughter loves the car and has put a lot of money into getting it just the way she wanted it (Lift kit, tires, rims, etc.) I hope you can offer a solution.