Not re-bedding the toe rail. The caulk is a boarder on both sides to keep water from getting under. Thought I had a picture but don't..... And yes... varnish over caulk looks bad. Thanks!!
Not necessarily. If you use a caulking in a mahogany color, and tape both the toe rail and the deck so as to leave a minimum filet of caulking. I'd probably use Boatlife Mahogany polysulfide, but just before the finish coat or two were left to apply, and go over the caulking with the varnish.
Nothing protects better than varnish. If you do it right, you'll need a yearly maintenance coat. If you do that and don't abuse the toe rails, you should get 10 seasons out of your initial build coats.
First: Staging: Have your wife stand with her hands at a comfortable position. Measure to the floor. Deduct that number from the average height to your toe rails. That is the measurement you should provide safe, working staging. She should end up here:
I like a heat gun and both pull and push scrapers to remove the failed varnish. At a comfortable height, the work isn't that bad, I sort of enjoy it.

This is the first time I had to restore the varnish finish on my toe rails since owning the boat in 2000.
They had a few wear spots that I leveled with sharp planes (you probably won't need this step).
That step trued them up and restored the crisp edges. You shouldn't have to sand much. I used small blocks and 80 grit paper to further 'flatten' the surface. Flat is your goal, cupping or dishing with mechanical sanders will leave in worse shape than you found them.
The best trick I've found is to roll and tip the varnish on. Use small foam rollers, even cut the rollers if you need. This will apply a thick, even coat of varnish, almost impossible by brush alone.
Without getting into details, varnish is a great way to protect brightwork, like toe rails. These high shapely toe rails
are now 58 years old. It would cost a small fortune to replace them. FYI, I didn't caulk the toe rail to deck joint but I always tape just beyond the wood onto the deck. They seem tight still today, thanks to varnish protection.