Creativity improves the overall sense of well being in patients with Dementia. It helps them gain more meaning/purpose associated with their lives and makes them emotionally resilient. During the creative activity the whole brain seems to be working in unison, which should promote the formation of new synapses and neurons, including those related to memory.
Also, the activities are often done with groups of people which helps prevent isolation and depression. Dr. Dalia Gottlieb-Tanaka is doing work in this area, she is also the chair of the Society for the Arts in Dementia Care. Here is an interesting review of the topic:
Hannemann, BT Creativity with Dementia Patients, Gerontology 2006, 52:59-65
Adolfo Cotter, MD