Originally Masquerade counted as both gaining and trashing. Valerie didn't like how it was gaining without gaining and trashing without trashing. To me gaining meant "now it's yours" and trashing meant "now it isn't," but to Valerie gaining meant "take it and put it into your discard pile" and trashing meant "move it to the trash." She could see it being that you gained the card but didn't trash it, but I felt it should be both or neither. So it's neither.
Interesting how possessed masquerades would work otherwise.
You'd need the "lose track" rule, which hasn't been published or even finalized yet. But I think I can make a pretty good guess. My sense is that Masquerade would trash the card passed
from the Possessed hand, then Possession would set it aside, then Masquerade would try to have the player on the left gain the card but fail since it expects the card to be in the trash. So the Possessee would get the card back at the end of the turn. The Possessor would still have to trash-pass a card, but as soon as the Possessee gained the card from the trash, the Possessor would gain the card instead.
So in a 2p game, if we call the Possessor "P" and the Possessee "V": P takes a card from the hand and puts it in their own discard pile. V takes a card from the hand and sets it aside, getting it back in the discard during cleanup.
In a 3p or more game, if we call the person on the Possessee's left "L" and the person on the Possessor's right "R": P puts a card from their hand into their discard. V sets aside a card from their hand and gets it back in the discard during cleanup. L gets nothing but must pass a card to the left. R must pass a card to P. The cards passed from L and R do go into the hand of the person receiving the card, as normal.
So I think the "passing" mechanic was absolutely the right choice, instead of trash&gain! Passing is much less complicated with Possession.