Differences Between a Power of Attorney & a Letter of Authorization

Actors and baseball players aren't the only people who need agents. Life is complicated so we often must appoint surrogates to help carry out our wishes, handle our money or make life-and-death decisions about our health care. You can use both the power of attorney and the letter of authorization to designate agents, their duties and their limitations. Be aware, however, of the important differences between the two kinds of documents.

A letter of authorization is a document that gives another person, known as an "agent," the authority to act on another person's behalf, known as the "principal." The letter spells out the specific task that the principal has assigned to the agent. The principal can be an individual, corporation or some other entity. The task can be picking up the principal's dry cleaning, borrowing money on the principal's behalf or negotiating a contract for the principal. Under agency law, the agent's actions on the principal's behalf bind the principal. In other words, the agent steps into the principal's shoes and the principal is responsible for the agent's actions -- and mistakes -- undertaken on the principal's behalf.

A power of attorney is a document, signed by a principal and typically notarized, that gives another person the power to make decisions on behalf of the principal in accordance with the terms of the document.. The party being granted authority to act is commonly referred to as an "agent" or "attorney in fact." The agent need not be a lawyer, however. A general power of attorney allows the agent to undertake a range of activities on the principal's behalf, such as managing the principal's money and handling the principal's real property. A special power of attorney is akin to the letter of authorization, spelling out just what the agent is authorized to do on the principal's behalf. A durable power of attorney stays in effect even if the principal becomes incapacitated because, otherwise, a principal who can't make decisions can't delegate powers to an agent. If the power of attorney lets the agent make health care decisions on the principal's behalf when the principal is too sick to make them himself, it's called a health care power of attorney.

Read More: Does Power of Attorney Override a Will?

Usually the agent's authority expires once the act described in the letter of authorization is carried out. The power of attorney, however, is usually open-ended. If there is no expiration date written into the power of attorney, the agent can continue acting on the principal's behalf until the principal revokes the power. The principal does this by issuing a written and signed revocation and sending it to the agent and any other party who received the power of attorney. If the power of attorney deals with real estate transactions and is on file with the county clerk, the revocation must be filed with the clerk, too. The principal also can revoke a power of attorney or letter of authorization by tearing them up. If the principal dies, the power and authorization die with him.

The principal pays for the agent's mistakes so the principal should choose his agent carefully. After all, the principal may literally be entrusting his life to his agent. In most cases, the agent is a friend or relative of the principal and no money changes hands. If the agent is to be compensated for his work, the financial details should be spelled out in the authorization letter or power of attorney. Letters of authorization rarely are notarized, but signatures on powers of attorney should be. Hospitals and nursing homes usually require that durable powers of attorney be witnessed and notarized.