Then this seems to be the loophole that needs to be resolved. Before the estate pays out, the debts should be settled within the estate using the cost basis belong to the deceased. Assets paid out after loans are satisfied should then have their cost basis reset (if that happens at all, I don't want to take a stance either way if that should happen, except it should only apply once loans are repaid if it ever does apply).
Mechanically, I don't think that works. What prevents the debt from attaching to the inheritor before death (e.g., co-signed loan)? The only solution here is eliminating the cost basis step-up at death.
