This will help you to communicate with the tenant regarding maintenance requests, demands for service, handling maintenance and repairs during the tenancy, what the tenant may owe during the tenancy, handling security deposits and claims, etc. 4. 

They left the property filthy and trash behind and claimed it was clean!

If you seriously want to clean this up and are willing to take a risk, I would absolutely switch things into my name and begin taking care of the property as my own...it takes up to 10 years, but if you'd be willing to start caring for the property and were able to at least rent as a break even, pay taxes etc, then it's no big loss if the owner came back and stopped your claim.

Assuming one of you will be claiming this as business income, you should have a separate business bank account and here's the relatively short answer why. 

Keep in mind any good plaintiff's attorney is going to bring all parties incidentally related to the legal claim in as an additional defendant.

For example, I often see Buyers purchase property thinking there is a $1,000 deposit but then the tenant claims it was $2,000 because they paid the last month's rent.

Here in Charleston, in order to apply for the legal residence tax assessment ratio, all owners have to provide copies of tax returns, utility bills, driver licenses, vehicle registration, voter registration, and the settlement statement/CD, along with an affidavit stating that all owners occupy the residence and do not claim legal residence anywhere else.

They should file an insurance claim.

Do I create an LLC to own the property and use a quit claim deed to transfer ownership?

Unless you have some freakish "claims made" policy, the canceled insurance will cover you as you were insured at the time of the incident.