Cushla, this is what i have found out, because i have done the same. I have left a substantial amount of life insurance funds to an inmate, which all my family are aware of and support, also the person receiving is aware for obvious reasons.

Question 1.....
In our particular case (not in the same state as your friend) he would have monies taken out as deemed by the state he resides in, and it would be a lump sum no matter the amount bequeathed going into his accounts/books. BUT once restitution is made their will no longer be that debt, but the rest of the percentages will still stand. In our particular case their is no "tax free" monies allowed per annum as you put it in your first question. BUT i also have a friend in another state and NO monies are taken out, he receives 100% of monies given, so this would NOT apply to him as far as i know. The amount you are talking seems to be correct, given all i know of the percentages taken for some states and inmates.

Question 2....
The way i have gotten around this is left the money to a 3rd party to be handled for the inmate on an ongoing basis. But will be looking into it more throughly when i am over later this year, hoping to secure a better option as i know they are unable to hold accounts in the free world in their own name. Well in our case anyway from information received.

Question 3.....
I am clueless, SORRY, but i hope someone will have answers.

It does seem unfair at a glance, but i think we all need to pay our debts, and if restitution is part of that i believe it fair to be taken out in a lump sum. To be honest even though i don't agree on the percentage taken from some inmate accounts, where and when do you draw the line?
I know it is an extra burden on many families, because some want to see their loved one's have the basic needs and wants, visits to the doctors, dentist, hobbies, whether it's the gym, wood work or art work, little extra food, talk time, letter writing materials and stamps, personal hygiene products, care packages of food and clothing. Books to read, courses they want to take and participate in. Many programs are run by volunteers and community support, and most times it is those same loved one's that are putting their hand in their pocket. Not to mention visits and the cost of travel. That is not to say they cannot make it on their own, but as most of us know even a little goes a long way inside. Their are no winners when it comes to the prison system, especially for those left on the outside supporting and looking in. But i guess it just boils down to choices, no matter how harsh they seem.

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The last of all freedoms is the ability to choose one's attitude in a given set of circumstances.
G. W. Allport.