Wakefield Council decided the cash had been gifted to "deprive" herself of assets after she'd move into a residential home, a report by the Local Government Ombudsman said.
Councils are only expected to pay for individuals' social care if they have less than £22,250 in assets.
The woman's daughter appealed against the ruling, saying the gift was paid to her to cover her debts.
But the Ombudsman rejected the appeal, saying it found "no fault" in the way the council handled the case.
In its report, which anonymised those involved, the Ombudsman said the woman moved into a care home in early 2016 after she began to "feel isolated".
A few months later she sold her own property for £128,000 and gave £25,000 from the proceeds to her daughter.
In January 2019, the woman's daughter asked the council to help pay for her mum's care fees, which by that stage were £875 a week.
The council said it would only contribute after the following December, because they'd included the £25,000 gift in their assessment of her finances, and that put her above the threshold for needing help.
However, almost all of the money had already been spent, with the woman's daughter claiming it had been used to clear her outstanding debts, which at one point had "put her at risk of losing her home".
However, the council took the view that her "financial situation was not as pressing as suggested because she was already slowly paying her debts by arrangement".
The local authority later upheld its decision following a review.
The report said that the elderly woman "sadly died" shortly afterwards.
In its conclusion, the Ombudsman said she, "Was already in a care home when the £25,000 was transferred, so she had a reasonable expectation of the need for care and support.
It added that both women knew the mother, "Would need to contribute to the cost of her care once her funds dropped below the threshold."
It concluded: "The only remaining consideration is the motivation. The council considered this and concluded that avoiding care and support charges was a significant motivation for the transfer of monies.
"My role is to consider whether the council made its decision about this properly and I am satisfied it did this."
Local Democracy Reporting Service