I'm running my /data and /sdcard partitions encrypted, and the "luksunlock" binary is launched from init.rc to read the password and unlock the encrypted partitions.
I have included my somewhat modified init.rc for those interested.
For more information about LUKS on Android see this blogpost, written by shawn (Seems I'm not allowed to have urls in the post, but Google for 'android luks' , first hit)
This works good on Wildfire, altough it should work fine on other phones as well. Just remember that you need to set up your partitions as in the luksunlock.c (or change the defines).
Dont forget to backup before you start playing around!