How to install headset with Triple Tree Forks?

I cut mine just below the top yoke drove the star thing down inside the took my top cap and just screwed it down tight so it sits in the hole on top of the yoke.
 
Which way is the right way to install the headset?

1: View attachment 86914

Or this way?

2:View attachment 86915


And if it is the second way, do I cut the steerer tube flush with where the clamp is, and then install the top cap just against the metal?
I didn't use the top cap. I installed the cups and bearings the bearing caps, I cut the tubing between a 1/16 and an 1/8 below the top of yoke. Pounded the star down into the hole put the yoke in place screwed does the top cap it sits into the hole and since it's a bit bigger diameter than the hole in the yoke it's mostly flush with the top.its been on for a year without any issues. The only issue I have is the tube on the triple tree forks is 1 " and that whole is like fricken 2 inches. I bought a spacer to go inside but it's not actually big enough.so I need to figure out something else to fill that void in with so it doesn't move around. I'm thinking just filling that space with that spray liquid foam
 
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