I'm reopening this thread briefly to post our decision.
First, I'd like to thank Colleen for raising the issue, and everyone else for discussing it in a largely constructive way.
We are going to replace Transvestite with a very slightly rewritten version of the Gender Nonconforming Flaw that I proposed, as below.
Gender Nonconforming
Personality, Major or Minor
You do not conform to the expected behaviour for a person of the gender that your society would assign to you in the absence of social cues such as clothes and behaviour. This may mean, for example, that you dress as a member of another gender, or that you structure your life in a way considered appropriate to another gender, or that you are sexually attracted to members of the same gender. It does not necessarily mean that you disagree about what your gender is, although it may. As a Minor Flaw, it does not normally cause you problems, whether because your society accepts your behaviour, or because you can turn people who object into newts, or for some other reason. As a Major Flaw, it does cause you problems.
(I added some language to make it clearer that the concrete examples are just examples, not an exhaustive list, and revised away from gender binaries.)
We decided that there were enough problems with the phrasing of the original Flaw that we couldn't just leave it as it stood. On the other hand, the Flaw was originally introduced to the game by a trans person, and at least one member of the LGBT* community posted a strong request to keep something like this in the game. Representation and visibility are important, and we decided that a less-prescriptive version of the Flaw was the way to go. By including the Flaw, we are saying that these sorts of characters are a valid choice in Mythic Europe.
On a purely practical level, the Flaw is referenced in several supplements, and it was much easier to errata them to refer to Gender Nonconforming than to rewrite them to avoid referencing any specific Flaw. (One of those cases is magical tortoiseshell cats, and Gender Nonconforming is a much more appropriate name for the Flaw there.) We are planning to update the for-sale versions of the supplement PDFs, but this will take some time as we need to consult and ensure that we are making the right changes.
The insert about Flaw choice is too big for errata, strictly speaking, but I will see what we can do…
Thank you again for all your input. I am now going to close this thread again.