Seahorses do better with more vertical distance. I'm going to set up a 30G Extra Tall for seahorses, somewhat similar to what you are proposing. If you go with dwarves that might be a good enough size (assuming it's a standard 29G).
The 'fuge would be better above the tank than below it, so critters could flow naturally downstream rather than being potentially crushed by the impeller of a pump. Most smaller critters would survive, but lots of mysids and amphipods will be killed or prevented from crossing by the pump pre-filter.
But that isn't always possible...
I solicited feedback also on my setup. There wasn't really a consensus but I think I may bring the return over the lip of the tank; if the return is below the water line you will empty the tank if the pump fails, which is not good. You could use a check valve but I don't like to trust just one safety measure.
I plan to run the return down and bring it up from around the center to produce random flow around the top of the sand bed, and cloak the return elbows with rock.
I may do the overflow in the middle or off to one side, behind a 3" or 4" PVC tube. It might look clean enough to be unassuming (a single white/coralline-encrusted column seems potentially more elegant than a box on one side or the other), and it could be decorated with rock or coral frags. Still pondering the possibilities.
Good luck. Ultimately, we can't go wrong with all the abundance of possibilities...
Brad