So if I understand this... by the end of eight months if i research a lot of diplomacy and build a big military I can potentially get the other civs to trade me all of their planets? I didn't know that military ability would even factor in to a trade. Or am I just making the demand?

You declare war. With your military might, they will want peace. So you 'offer' them peace for most of their planets. That's why you need both diplomacy (preferably Super Diplomat so you can do this faster) and military (so they want peace at all cost).

Basically it's "Surrender or 'I kill you!'".
All in all not so strange that the enemy falls for it and as pointed out, it does have precent in the current world. However that all enemies crumble is a bit strange, in the real world, there'd always be a a ruler too stubborn for his own good...

For DL this is pretty much correct although there is a large amount of "knack" that you need to develop for the timing and precisely how much military and diplomatic advantage that you need and what you can get away with and when.

However this is broken quite a bit further in DA and you actually need neither a diplomatic advantage or a military advantage you just need to know the "trick" of asking.

For DA basically you can offer everthing you own for a single planet with no diplomatic advantage and no military advantage and the trade will be red. Ask for a few more planets and the trade stays red. Keep asking for more and more planets until you're asking for all of them and suddenly, surprisingly the trade turns green.

But wait, there's more. Once the trade goes green you can now start eliminating items from your side of the offer and the trade stays green. You continue removing items from your side of the offer and the trade stays green. You get to the point where your getting all of an AI's tech, money and planets for a couple of attack 1 tiny fighters.

Sometimes you have to let the state of war exist for a turn or two but no matter if the AI takes a couple of planets, you're going to get them all back shortly anyway. However often you don't even need to wait a turn.

But wait you say, in DA don't I have to wait 8 turns or so before I can talk to someone after a war is declared. Actually there are at least two easy ways around this, but that's another story.

If the trend is any evidence this doesn't bode well for ToA.

Hmmm, actually there is a small trick, almost unnecessary to fix it, right guys? Just stick with a good race from beginning on (Torian, Drath etc..) and you will be able to pick up those evil bonuses on your way to xeno-ethics and at the end it looks like you won't need to pay a dime and can choose good if you want to.
I sometimes do it like this and it seems to function...it's not saintly either..