I have more muscle after this 3rd (and final, ha!) pregnancy then ever before--mostly due to heavy training after delivery.
Muscle either gets bigger or gets smaller. If you stop training for long periods of time (longer than a few weeks), then as Galatia said, the muscles will just slowly revert back to whatever your previous size. If you start training again (and eating sufficient protein), they will grow again.
The "muscle into fat" myth came around because usually when people stop training, they also stop eating right, and gain fat. Fat forms within the muscle, too (think prime cut of steak vs a select cut), making the muscle flabbier....so some think it's changing to fat. It's not--just adding fat to it. As well as fat everywhere else,
It's smart to take a week or 2 off training every now and then--all bodybuilders/strength athletes do--allowing the body/joints a break. You won't lose much (if any) muscle, esp. if you're continuing to eat adequate protein. Also, the fatter you are, the less you have to worry about losing actual muscle. It's not until you hit the lower bodyfat levels (like Jillian's and beyond) that it becomes a significant concern.
As for the 2 pix you posted--Jillian is at a low bodyfat there, but not as low a bodyfat as the 2nd pic. You can't really compare the 2--that bodybuilder is going to look really different in her "fatter" off-season look than she is in that competition phase pic.
Not to mention, IMO that BB pic has the classic signs of steroid supplementation. Using AAS (anabolic steroids) enables women to really "bulk up", above and beyond what they could do naturally.