Lee
Overlay definitely gets my vote! Butting vinyl up leaves gaps when shrinking, as mentioned, and there are also a lot of thin vinyl tips to peel when washing etc. Ofsetting looks SUPREMELY common, (as in hillblly common) because you wil see "seams" and sometimes the vinyl is slightly translucent, changing the colour. Applying red over black will usuallly chance the colour of the red. (same applies to layering – apply dark over light, opaque over more translucent colours like red / yellow)
In corel, I simply copy the top colour. After copying, select both parts (body and shadow) and weld together. This becomes the bottom layer. Simply "paste" top layer back, and Voila! When cutting you can select the seperate layers and cut. I still use this when prepping files to print and cut on the Versa Camm, because the bottom layer becomes the cut path.
TIP: Before cutting, place a block around the text group. When cutting, select this block together with the layer you are cutting. After weeding and applying app. tape, cut the graphic along the edges of this block. This makes it easy to apply, since you need only to place the two on top of each other – no need for light table! Oh, dont apply application tape to the bottom layer! I normally dont layer the vinyl on the substrate I’m applying to. I layer first, and apply one shot.