How do the FAR's define a cloud?
My question is, when there's no defined cloud layer, what is
  considered "cloud" and what isn't? If the minima require you to stay
  500 feet below clouds, where exactly is that? With metars showing no
  ceiling how do you know where it is safe to fly and where there might
  be an ifr flight descending that can't see you?


The FAA defines clouds in AC-006B 


  A cloud is a visible aggregate of minute water droplets and/or ice
  particles in the atmosphere above the Earth’s surface. Fog differs
  from cloud only in that the base of fog is at the Earth’s surface
  while clouds are above the surface. Clouds are like signposts in the
  sky that provide information on air motion, stability, and moisture.
  Clouds help pilots visualize weather conditions and potential weather
  hazards.


However legally and practically speaking you can fly as high as you like if there are no clouds provided you can maintain situational awareness and proper cloud clearances from any adjacent clouds (including those under you). There are a few practical limits to this. First off Class A airspace starts at FL180 so you cant fly above 18,000 Ft. without being on an IFR flight plan since you cant fly VFR into class A. Further more, since you seem to be asking about small aircraft, you will more than likely be limited by your airframes maximum altitude before hitting the Class A limit. You will also need O2 onboard to fly above 12,500 ft. 

The risk of a descending aircraft above you is always a concern be it VFR or IFR flying as they generally cant see below them and you cant always see above you when flying. In many cases the IFR flight will have some help from ATC who will see you on radar even if you are flying VFR and squawking 1200 on your transponder.