Pearl I am watching your thread. I am hoping to find an answer too. I know someone on here did NFSC and substituted the sugar for Splenda and added an extra 1/4 cup. They also added one box of sugar free vanilla pudding. I haven't tried it yet, keep thinking I will. Both of my parents are diabetic and I know Splenda has sugar alchol in it but still it has to be better for them than real sugar.
Have you tried searching online?
I googled it and found this:
http://www.fitnessandfreebies.com/diabetic/sugarcookies.html
But I didn't go any further than that.
You can search for "Diabetic friendy" sugar cookies, etc.
I found a recipe you might want to try though I seem to be a little late .......My step dad is diabetic and I just happened to be at my moms yesterday and came across a magazine she had called Diabetic Living. I don't know how this tastes but there just happened to be a recipe in there for sugar cookie cutouts, may be worth trying.
1/4 cup butter, softened
1/2 cup sugar or sugar-substitute blend* equivalent to 1/2 c. sugar
1 teaspoon baking powder
1/4 teaspoon salt
1/4 cup canola oil
1/4 cup refrigerated or frozen egg product, thawed or 1 egg
1 teaspoon vanilla
2-1/2 cups sifted cake flour
1) in large bowl, beat butter on med speed for 30 seconds. Beat in sugar, baking powder and salt. Add oil, egg and vanilla; beat until combined. Beat in as much of the flour as you can. Stir in any remaing flour. Divide dough in half. Cover; chill for 1-2 hours or until easy to handle.
2) preheat oven to 375. on lightly floured surface roll dough half at a time to 1/4 in thickness. Place on cookie sheet 1 inch apart. Bake for 6 - 8 minutes. Makes about 48 cookies
*Sugar Substitutes: Choose from Splenda sugar blend for baking or equal sugar lite. Follow package directions to use product amount equivalent to 1/2 cup sugar.
Let me know how it tastes if you try this soon.
Splenda has their own Sugar Cookie recipe. I've included the link for you to check it out:
http://allrecipes.com/Recipe/SPLENDA-Sugar-Cookies/Detail.aspx
Hope this helps. 
Instead of using royal icing, how about sugar-free chocolate melt? You could try to melt it and decorate it on the cookie. Like royal icing, chocolate can turn hard. YCChocolate sells sugar-free chocolate by the bulk. Here's the link:
http://www.ycchocolate.com/114.html
After checking out the magazine again it says to use with Cream Cheese Frosting and this is the recipe they gave and they also mentioned NOT to use any sugar substitute
1/2 of an 8 oz pkg reduce fat cream cheese, softened
1 teaspoon vanilla
1/2 teaspoon butter flavoring (optional)
3 to 3 1/2 cups powered sugar
Food coloring (optional)
IN a large bowl beat cream cheese, vanilla and butter flavoring with mixer on med speed until very smooth. Gradually beat in enough powdered sugar to make a frosting of spreading or piping consistency.
Makes about 1-1/4 cups.
Since this uses cream cheese wouldn't you have to refrigerate? If so doesn't really sound like the ideal icing to use but it sure sounds yummy
I did a google search for diabetic Icings and several recipes I saw were like this one. This came from diabetes123.com
A lovely and sugar-free decoration for your cutout is known as edible tempera paint which you can make by beating 2 egg yolks and dividing evenly into four small bowls. Add liquid food coloring as follows:
Blue or Green = 1/4 teaspoon
Red or Yellow = 1/2 teaspoon
Use a small paint brush to paint on the cookie before baking. When done, the cookies will have a beautiful, stained-glass appearance.
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