I think I would have went with it the way you did. Your dads cousins intensions seem clear. Assuming he was in his right mind, he would have known that giving the house to you and your brother would have less in the will to be given to the others. Maybe the death transfer was his way of avoiding having to make a new will and he knew the state would take everything else of value from his estate, effectivly leaving nothing for the others.
I wouldnt sweat the state comming back for the house. If it was an issue, the lawyer would have brought that up, rather than the 4-way split. That or the lawyer was an idiot. Its doubtful the state "goofed" and if they did, Im not sure if they will come back after the fact, although I have nothing to back that up. If you want to know the look back period that WI follows, I think most would be able to be found online so you dont have to draw attention to the situation just to find out. Here is one link I found. http://www.emhandbooks.wisconsin.gov/meh-ebd/policy_files/17/meh_17.3_look_back_period.htm
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