If your sister is interested in taking movies, TV shows, and audiobooks around with her, I'd recommend the 32G. If she were mostly doing apps, music, and ebooks (and browsing), then the 16G would be fine. Also, if her movie and TV watching was limited to Hulu Plus and Netflix, which both stream, then she might not need the extra storage.
The next iOS update will bring a lot of cloud features to the iPad (access to stuff stored on Apple's servers). A lot of cloud strategies entail streaming content directly from the web, which would seem to mean the device itself won't need a lot of on-board storage space. But, Apple's cloud strategy (so far) sounds like they expect you to download stuff as you need it to your device, as opposed to streaming. So you may not see as much savings in terms of storage usage. (Obviously you could keep deleting content before downloading more, but it isn't that optimal a solution for some)
I've had both the iPad and iPad 2 at 32G, and had no problems keeping them full.
But my sister now has my iPad, and she doesn't watch movies or TV shows, so she probably could do well with a 16G iPad...next time
