First of all
to the NGA!!
Your first idea is the best idea, by centering the yard side pickets on the gap of the road side pickets. (Of course the yard side material must be the exact same width as the road side pickets.
) It's called shadow box. Typically this fence style has a wider gap between the pickets and it IS pretty private, so with small gaps, undoubtedly, you'll achieve the privacy you're looking for. You'll definitely need to leave at least a small space between the pickets, just as it is on the road side, for expansion in the warm months. If you aren't sure, perhaps you could buy just a few pickets and install them to get an idea of what it would look like.
I do not recommend your second idea. It would place too much weight/stress on the road side pickets that aren't designed to hold ANY additional weight at all (beyond decorations) and yes, most likely they would split.
As for knot holes, perhaps you might replace any knotty road side pickets with solid, knot free pickets.
I do not see the gap at the top of the masonry wall, but my educated guess would be that you could add another horizontal rail that butts up underneath the bottom rail that the pickets are fastened to, to fill the gap in good and solid, as long as that gap isn't larger than the width of a rail.
Your instincts are spot on, my friend! Hope this helps! Good luck to you!!
