Just cut it off and put a Flowmaster on where the muffler is now. Put a turndown on the end of the flowmaster, and cant it 45 degrees to the outside. It should give you the sound you want. You can use the Flowmaster on the new engine with a matching one for the other side. Whatever size pipe you are planning for the replacement engine, get the Flowmaster in that size and use an adapter to your current pipe.
When you go to true duals, you need to make a hump in the driver's side of the trans support for the pipe to go under.
If you are going to put a 350 in it, go for an LQ4 and matching transmission. The cost is not all that much more, and you get a lot more HP (almost double).