I've always liked the idea of possession and domination in D&D, and have used it to terrifying effect several times in my campaigns. While it's important to remember that hijacking a PC be very un-fun, if used sparingly and effectively it can be a powerful tool.

First, unless you have unusually cooperative players, always remember to keep the possessed PC as involved as possible. This could mean allowing that player to help you decide what the possessing creature does on its turn, or allowing the character to make an opposed Charisma check to speak to his or her allies through the possession. This is even more important if the possession was unexpected, as the players haven't mentally prepared themselves for the loss of control.

Second, while possessing NPCs for long periods of time to accomplish long term goals is fine and encouraged, only possess PCs for as long as you need to and then toss them to the curb. In most cases, the PCs are dangerous wild cards with powerful, loyal allies; most possessing creatures will recognize this and GTFO as soon as they can.

Also, when running a creature capable of possession, never forget the epic versatility of this ability. With little effort, such a creature could manufacture an incredibly complex veil of deception the likes of which most PCs, not to mention players, should come to fear. Law enforcement, military organizations, and politicians are some of the more obvious choices, but merchants can also be turned away, making loot unsellable and items unavailable. Innkeepers and landlords are also good targets, forcing the PCs onto the streets. The possibilities are endless.

Anyway, this is really just an excuse for me to show off this demon I made a while ago after watching the movie Fallen (an excellent film, if you ask me). He works on a much different dynamic than most monsters (for example, he has no attacks), so I'm not sure if the CR is appropriate. Any suggestions?

Nalfortet        CR 5
NE Huge outsider (evil, incorporeal)
Init +3; Senses Listen +9, Spot +9; darkvision 60 ft.
Languages Abyssal, Common, Infernal
DEFENSE
hp 38 (5 HD)
AC 15 (+3 Dex, +4 deflection, –2 size), touch 15, flat-footed 12
Immune cold
Resist incorporeal
Fort +6, Ref +7, Will +5
Weakness holy water vulnerability, possession dependency
OFFENSE
Speed fly 40 ft. (perfect) (8 squares)
Melee —
Space 15 ft.; Reach —
Base Atk +5; Grp —
Special Actions haunting presence (DC 16), possession (DC 18)
STATISTICS
Abilities Str —, Dex 17, Con 14, Int 11, Wis 12, Cha 19
Feats Ability Focus (possession), Improved Toughness
Skills Bluff +12, Diplomacy +14, Intimidate +14, Knowledge (local) +8, Knowledge (the planes) +8, Knowledge (religion) +8
ABILITIES
Haunting Presence (Su) Creatures may enter Nalfortet's square as though it were normal terrain. Any enemy in Nalfortet's square takes a –2 penalty to attacks, saves, and skill checks as long as it remains.
    If Nalfortet is possessing a creature, he can also manifest several ghost-like apparitions as a move action. These appirations surround a target within the area of his haunting presence, which beg the target to stop hurting the possessed creature. If the target fails a Will save (DC 16), it is unable to attack the possessed creature for 1 round. The save is Charisma-based.
Holy Water Vulnerability (Su) When Nalfortet is possessing a body, if that body is doused with holy water, he and the possessed creature take 1d6 points of damage each.
Invisible (Su) Nalfortet is naturally invisible, and appears as an amalgamation of horrified faces if viewed by see invisibility or true seeing.
Possession (Su) Nalfortet can possess humanoids and animals he affects with his haunting presence, feeding off of the creature's life force unless the creature succeeds on a Will save (DC 18). Nalfortet can control a single target at a time. The DC is Charisma-based. After failing this first saving throw, the possessed creature still maintains control over its body, becomes immune to Nalfortet's haunting presence, but remains unaware of its own possession. While possessing a creature, Nalfortet does not move independently of that creature, and remains constantly centered on the possessed creature should that creature move. While the creature is possessed, it appears to have an evil alignment to detect spells.
    At any time after the initial failed saving throw, Nalfortet may take full control over the possessed creature unless the creature succeeds on a Will save (DC 18). If the target's save fails, Nalfortet may act through the possessed creature as described in the magic jar spell, except that Nalfortet doesn't need a receptacle for the possessed creature's soul. This also means that the possessed creature isn't aware of what Nalfortet does when he has control of the creature.
    If a creature that Nalfortet currently possesses touches another potential target of possession, Nalfortet can, as an immediate action, attempt to possess that creature.
    The possessed creature takes 1d2 Wisdom damage each day it remains possessed. Any creature with 5 or more ranks in Knowledge (religion) may make a Knowledge (religion) check in an hour-long ritual, allowing the subject to make a new saving throw to resist possession; if either the new saving throw or the skill check beats the save DC, Nalfortet is forced from the subject and cannot attempt another possession for 1 minute.
Possession Dependency (Ex) If Nalfortet goes for 1 round without a possessed creature, he is fatigued. If he goes for 1 minute without a possessed creature, he is exhausted. If he goes 5 minutes without a possessed creature, he dies.