In an ideal situations, should the snare wires fit inside the butt plate or should the steel plate sit on the face of the butt opening?
They should be recessed inside the butt. Not only will it be more stable, but it'll protect those little screws and the butt plate from getting bent when they inevitably get bumped.
I can attach the P87 end, then the P34 end the steel plate sits across the opening...Now this "works", but there is a lot of tension in doing so even with the wires slacked as much as possible. There is no "off" for the strainer on this set up...just snare.
Nahhh... We can do better than that. Let's make this thing work properly. And those adjustment screws will take a beating. It wouldn't even be practical to put the drum in a case with those exposed outside the butt.
any chance I could find a later P34 butt, surely it would be cheaper then these snares are.
You could, and that is an option. I don't know how common they are, especially if you're looking for one with a weathered nickel finish. You may also need to drill at least one hole in your shell for the butt's third screw. I don't know if the other two screws line up, either. (As already evidenced, I'm not the world's foremost expert on the P34!)
I could easily make the plate you diagrammed and may actually go that route.
Of all the options so far, this is the route I'd go. It preserves your drum's original parts and doesn't make any permanent modifications. Decent snare wires should be easier to find and a whole lot cheaper than the ones for your P87/P34 setup.
The Puresound Vintage wires for a WFL 3-screw mount might fit well if you decide to go with an adapter plate. They have an overall length of 15¾", they have a single hole at one end that should work with the P87, and two holes at the other that should work with string. Here they are on the Puresound web site and here they are on Interstate Music's web site (they're the bottom set in the picture).