The lights are on
This ability is rather simple. All you need - I recommend that you turn the auto-level up feature off entirely in order for this to work effectively - are about ten squad points, so I recommend you save up - or you could use the Retrain Powers ability at the research terminal for Shepard.
Basically, with the squad points saved up, just choose a character's ability and purchase the first three tiers of that specific ability. Then, highlight the fourth tier, and press "a" and "x" at the same time. If you do this correctly, the number of points you spent will be returned to you - in this case, since you spent ten squad points, you would get ten squad points in return! The amount of points you get in return depends on which tier you started on before you evolved your power/stat. If you were on the second tier and you did this, you would only get about seven points (3+4= 7) in return, while if you'd already purchased the first tier, you'd only get nine in response. It may sound a little confusing, but you'll get it once you've tried it.
You should see why ten squad points is recommended for this trick, as you can effectively max out all your character's abilities, as well as those of your squadmates. However, unlike Shepard, you can't undo spent squad points with Retrain Powers, and having the setting on auto-level up for your squadmates spends the points as soon as they level up. Hence, using this trick early can give you the advantage you need to survive, especially on harder settings.
NOTE: The new Mass Effect 2 update doesn't allow this trick to work anymore, so you might want to wait until you've gotten all the characters you want to max out before you accept this patch. If you can't, you're just out of luck.