I agree to most of your post, but there's one thing I disagree with:
Furthermore I think it is worth considering sMerits not being spendable/giftable to legendary accounts, they are effectively wasted as there is nowhere for them to progress from Legendary.
Merits can also be used to select posts worth reading. By excluding certain members, you make Merits less valuable to the forum. I assume (in the long term) theymos will give all sources combined enough sMerits to give them to all members who post quality. If 50% goes to Legendary members, the total can just be doubled.
Update: I forgot to add Legendary members can also "pay it forward" by giving away the sMerit they receive with their Merits. If you exclude Legendary members from receiving Merit, you also exclude the most experienced users from giving them away.