Judge Davies said: "There are many parents who have to look after disabled children.
"The majority do so without the sums of money that were awarded to your daughter to help with her care. They do so out of love."
The judge explained how Miss Svendsen has limited speech and has little body movement. She can move one of her hands, which she uses to operate her wheelchair.
Judge Davies said the initial medical negligence pay-out included a direct payment to Watson of £270,000 for expenses she had already incurred. It also provided for a £4,000-a-month income for the family on top of benefits they were entitled to.
The rest of the money, the judge said, was supposed to be invested to provide a secure income for Miss Svendsen for the rest of her life.
The judge said all these payments, plus rental income from a property portfolio, meant the family had a large legitimate income "but it was not enough to fund the extravagant lifestyle that you both clearly enjoyed for a substantial period of time".
She said that for about five years the couple, who divorced in 2004 after a 14 year long marriage, were spending about £117,000 a year.
Among the spending was £12,000 on Watson's cosmetic surgery and how she bought a business called Cathy's Wedding Bliss which "failed miserably".
She said they had also bought 15 or 16 luxury cars.
The judge said that partly as a result of her parents' actions, Miss Svendsen's fund was now extremely depleted and only £150,000 remained.
Judge Davies explained that because Miss Svendsen was no longer being looked after by her parents, professionals were now caring for her at a cost of almost £100,000 a year.
She said the fund will probably be exhausted in two years and the State will then have to pick up the bill.
"I do not know what the consequence will be to her (Miss Svendsen)," the judge said.
"She is well aware of what you have done and the emotional impact on her cannot be ignored."
Judge Davies said that the the couple legitimately bought a huge house in the Cleethorpes area for £117,000 and spent up to £600,000 renovating it and adapting it for their daughter. But, the judge said, it was now only worth £425,000 because most potential buyers have no need for the adaptations.
The judge explained how much of the money stolen by grandmother Watson and Hills was secured from the Court of Protection - the body that administers the compensation payment - in order to invest in property for their daughter.
But, she said, the pair sold the houses and pocketed the cash.
They even made a down-payment on a property in Florida and then spent the £90,000 when the deal was cancelled.
Judge Davies said the total amount of money stolen by the pair from their daughter was just over £450,000.
She was particularly scathing of £31,000 in cash Watson took out of a bank account when she realised the police were on to her and "you knew the game was up". Judge Davies ordered the six month sentence she imposed for this be served in addition to the five years for all the thefts.