Domain functional level

I've actually been working on the same thing except on multiple forests and domains. You have two routes either in-place upgrade the domain controllers to Server 2012R2 then 2016 or build new 2016 servers and then cut over to the new servers. I'd highly recommend the latter as it's a lot cleaner. For the handling the forest level components your user account will need to be a member of the schema and enterprise admin groups. There is no reason you can't upgrade your domain controllers. If you have partner ships with other external domains you may want to keep the functional levels the same as theirs only if you have users that have accounts in the partners domains.

When you start building the 2016 domain controllers start with the root level domain. When you promote the first new DC it should upgrade the schema level to support the 2016 schema. Then you'll need to move the FSMO roles and if the new servers are going to use the IP addresses of the old servers I recommend demoting one old server at a time and then re-IP the new server. You will have a little bit of clean up in DNS. If your DCs are also the DNS servers Microsoft likes to auto add the old servers as forwarders and when you re-IP then will become a DNS query loop so that will need to be corrected.

Side note if you use Exchange 2010 in your environment make sure you update those servers to at least RU22 otherwise they won't function with 2016 DCs

Great response, thank you! I didn't consider the Exchange environment which is 2010.

"If you have partner ships with other external domains you may want to keep the functional levels the same as theirs only if you have users that have accounts in the partners domains." I do, the issue is we want to upgrade they do not have plans on upgrading anytime soon. Is this going to prevent us from upgrading our agency.

Are they in their own forest or a child domain in your forest?

In their own forest completely separate

Thanks!