A simple criterion to help you make the decision is "Sharing or not".

If the xref to be shared among other drawings, then the best type for it is OVERLAY.

if it is only part of the host drawing, not part of other drawings, then the best type for it is ATTACH.

Copy and paste the xref in the new host drawing keeps its overlay property.

To copy the layer states in previous host drawing, you can export the layer states from previous drawing then import it into the new host drawing.