What multi pass setting would be the best option to choose?

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Does the degradation value means that the passes will have lower quality

Yes. Basically the time needed to generate a preview is spread between several passes: the more passes, the quicker each one renders.

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When turned on, the preview image is rendered in two passes Is this the legacy option?

Uhm, I see the wording can be improved here. "Legacy" is the 2-pass mode which was the only one in the times of Filter Forge 1.0.

Take note that this is one of those questions that basically and totally relies on your computer specs, your preferences on what you want to see, and ultimately what you want to do.

There is no such thing as "best" when it comes to user preferences. The "best" is your choosing. That's the point of user preferences in the first place.

If you want to see more preview and have a more interaction with your renders, choose 5 passes. If you want to just not care and see near-final quality choose legacy. If you want to see a bit more quality in between passes choose 4 or 3 passes.

Point being that these are your choice and it shouldn't be a matter of "what's best?" based on community preference.

Besides on what ground do you determine "best" in a case like this? Render times? Sure, passes do take SLIGHTLY more render. But so what? You're getting what you want: a nicer, faster interactive preview you can tinker with. There's no point in posting test results for render times either since my machine is different, your machine is different, everybody else has different specs. But we do know for a fact passes do take slightly longer in general.

So this doesn't have a specific answer. Your choice.

For the sake of argument here's my choice: 5 passes no degradation. Why? Because I like having interaction but don't like the render skipping bits and pieces around. End of story!