I am running 200 ft of 250 mcm Al (Rust) cable to provide 125 amp 240 volt service to my barn. What is the best way to transition from the large Al conductors in the cable to the bus connections in the breaker panels? Where does the ground rod need to be installed... barn or main panel?

I must ask. WHY such big wire?
Was it free?

Wasn't free but I got a good deal. I've always built things with an eye toward future expansion... and this is another case. I'd rather have the capacity and not need it rather than vice versa.

I've always built things with an eye toward future expansion...and this is another case. That's all well and good, but there is a point where it becomes a detriment. Like now.
That wire is even oversized for a 200A feeder. You are going to have a hell of a time terminating it. And it is going to cost you more money.

The way I would do it is to get Polaris type splices and splice a short piece of #2CU to go on the breaker.