Creating a Thought-Pip (Faded)

Basically I have a video where the main shot is a character doing something on screen. Whilst this is going on i'm trying to make a faded PIP in the top left corner that appears to be a thought (of the character on the main clip). I know how to make a PIP, and I know how to place it, but I don't know how to make it look..smooth, like a thought or flashback would. Basically i'm looking at how to make a PIP in the top left that sort of blends in to the main clip.

Running on Sony Vegas Pro 10. Any ideas? Thanks