generating AES 256 bit key value

You can construct the Rfc2898DeriveBytes Class with an arbitrary sized password and then derive a key of your desired size in this case, 256 bits (32 bytes):

private static byte[] CreateKey(string password, int keyBytes = 32)
{
    const int Iterations = 300;
    var keyGenerator = new Rfc2898DeriveBytes(password, Salt, Iterations);
    return keyGenerator.GetBytes(keyBytes);
}

In order to produce a deterministic output (i.e. same input will produce the same output) you will need to hard-code the salt. The salt must be at least 8 bytes:

private static readonly byte[] Salt = 
    new byte[] { 10, 20, 30 , 40, 50, 60, 70, 80};

Probably the best way is to use PBKDF2 using SHA256 (which will generate 256 bit output) and a application specific salt & iteration count. You should be aware that using an application specific salt removed quite a lot of the protection from PBKDF2, so you may require additional protection to alleviate this issue. One method would be to make sure that the database is safe, and that a maximum amount of tries can be used.

You are correct in stipulating that a 32 char passphrase is not a 256 bit key. It does not contain enough entropy, and some bytes may not even have valid character representations.