Works for me:

qemu-img create -f raw persist-crypt.img 512M
sudo losetup -f persist-crypt.img
sudo cfdisk /dev/loop1 (create one big partition)
sudo cryptsetup luksFormat /dev/loop1p1
sudo cryptsetup luksOpen /dev/loop1p1 cryptloop
sudo mkfs.ext4 -Lpersistence /dev/mapper/cryptloop
sudo mount /dev/mapper/cryptloop /mnt 
sudo vim /mnt/persistence.conf
sudo umount /mnt 
sudo cryptsetup luksClose cryptloop 
sudo losetup -d /dev/loop1

kvm -m 1024 -hda persist-crypt.img -cdrom /home/evgeni/Downloads/grml64-
small_sid_latest.iso -boot d

I put "/ union" in the conf -- sure you typed "union /"? :)
I booted with "persistence persistence-encryption=luks", but passing a label did 
work too, even though not needed in my setup.