I had the same situation - old metal windows with mud on the corners. My house gets ocean air, so the corner bead actually started to rust and bubble up through the plaster. ugly.
Rather than ripping it all out and redoing the plaster, which would be tough to match to the existing walls to begin with, I simply put MDF around the inside and face of the window.
The biggest problem comes with older houses and unsquare walls. Rest assured that caulk will fill in the gaps, and once painted, it looks like a fluid piece.
As an aside, I chose MDF because it was primed already, was economically in my budget, and if I screwed up would be cheap to redo. Also, I've been told it won't swell.
Hope this helps.
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