The reason you ran out of space was that your FileVault "file" was open and being extended as it was being copied. That's why you need to log out and into a non-FV account.
Smart Update can't "smart" update the inside of a file, only the file itself. So, you'll always end up copying the entire FileVault volume every time you back up.
The only way to work around this is to back up everything but your Home folder (e.g. exclude /Users/your-account in a script), and then separately back up your FileVault volume (which will appear in the source drop-down) with "Backup - all files" to its own partition.
Hope that makes sense.
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--Dave Nanian
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