How come none of my other windows including ones installed 40 years ago have gaps in the trim? I did have one that developed a gap like that in the garage that ended up leaking into the wall and had to be replaced.

There is no way air or water is getting through a mitre joint. You are worrying about a whole lot of nothing.

If the outside is wrapped in aluminum, its even more ridiculous and i mean that in a nice way.

caulking is the solution. Your contractor is 100% correct unless the outside is capped in aluminum which means you would NEVER caulk the mitre seam.

Agree with the above. Things can move around with time, temperature, and moisture. Frankly you are lucky if they are caulking that for free. Nothing wrong there

It is not wrapped in aluminum.

To answer you question above about the trim, it could be for a myriad of reasons.

The trim could have been installed during a warmer month with a higher relative humidity content and with dryer air, it will shrink.

Your windows that are 40 years old have much older and denser wood trim around them as compared to today's faster growth and wider growth ring wood. This will make that older trim less susceptible to dimensional changes with moisture.

Perhaps driving a screw into the miters would suck it in?

i like to prefab the trim and screw the miters and the sill then install as 1 unit.