Important: this is what I do and what you do is of your own choosing.
I make sure that the XJ's Transfer Case I am going to tow is put in Neutral and the Steering Wheel is unlocked in the Off Position and free to turn when Flat Towing and using a Tow Hitch Mounted to the Front Bumper and/or Frame of the XJ. I use Safety chains crisscrossed when towing an XJ. If the Coupler of the Tow Hitch comes loose from the Towing Vehicle and the Chains are crisscrossed the XJ should track behind the Tow Vehicle straight instead of side to side IMHO.
When I use a Dolly, the steering Wheel is not as important. I make sure the Towed XJ's Transfer Case is in Neutral Position so the Wheels will turn freely.
This is how I do it anyway.
Edit: I now see desertrandy answered your Question. Do not do it my way.... Do it by his Post, the "Jeep Manual" way.