I have played two other LARP systems which included drawbacks as a part of character creation, these ranged from a minor flaw to a major, and in my opinion almost unplayable disadvantage. One of the flaws was called 'intolerance' and the description literally ranged from 'you are uncomfortable in the presence of X race' to 'you attack the race on sight', this of course, taken at a medium or moderate level usually meant that players would constantly use in game racial slurs, pointy ear (elf) greenskin (orc or goblin) darky or damn dirty drow (for, yes you guessed it, dark elves) I never, ever had any issues with this (though I never played this particular flaw) and I see it as a character's choice, - is your particular character a bigot, does he or she hate another race for a particular reason (backstory?) and would they use in game racial slurs? yes? - then use them!
People who are drawing parallels to real life need to remember LARP is not real life! in Alliance LARP realms we don't have the history that we do in real life, on earth, in our respective country, etc. further I have never heard a real racial slur, from the real world brought into game and used in game from one character to another - I just don't think they fit the fantasy, they're just not applicable or just don't work in game.