Is this an existing home?

yes, it's an existing home.

I like your idea-- it could give you a larger closet and you could increase the size of the master bath, although I do not know how it would affect resale value. Another option would be to make the problem bedroom smaller and install a wall so you can create a hallway past it to your master. Not sure how functional it would be, it could be an office.

I'd just stop using Bed2 and the bath. Use it as a sitting room. Cheap fix that does the same thing you want to accomplish. The larger bath for the two bedrooms is big enough now.

I wouldn't make it part of the master since that's already rather large compared to the other rooms. I would probably take down the closets in bedroom 2 and remove the door/wall to the hallway. Use the space as a shared office, small family room hangout space, or maybe a playroom?

I am of the same mind as Elizabeth B. A loft/tv area/ hangout space would be nice there. The bathroom doesn’t really make sense, but if you are going to sell it soon I don’t think I would remove it.