We do not totally understand how Urim and Thummin worked in the Bible. We know they were objects that fit into a pouch of the breastplate worn by the high priest (Exodus 28:30; Leviticus 8:8). We also know that they were a way to ask counsel of the Lord (Numbers 27:21). Their use was restricted to the priest. After the return from Babylonian captivity, some priests who had a questionable genealogy had to wait for a priest with Urim and Thummin in order to determine their ancestry (Ezra 2:63; Nehemiah 7:65). We do not know if that priest ever showed up.
Other references speak of the ephod and indicate it included a way to get counsel from the Lord (1 Samuel 23:6-12; 30:7-8). It is very likely that the ephod had the Urim and Thummin with it. Other examples of revelation that probably came by way of Urim and Thummin are the idetifying of Achan (Joshua 7:16-20) and the refusal of God to answer Saul (1 Samuel 14:36-37; 28:6).
You question about distinguishing Urim and Thummin from forbidden practices of divination is difficult because of our ignorance on how it worked. I used to think that it was just some way to get yes and no answers from God until I realized that some of the answers they received were not yes and no answers. God could also refuse to answer by Urim and Thummin. The main distinctions I see is that the Urim and Thummin was established by God to be used only by the priest and that its counsel had the same authority as other forms of revelation--it was always absolutely true. In contrast, any form of divination established by man is an abomination to the Lord (Deuteronomy 18:10; 2 Kings 17:17; Acts 16:16).
