Is prefab hierarchy limited to just one level?

When I grab an object from my Scene to the panel in order to make it into a Prefab, I notice I can only see one level of the hierarchy I have set up. When instantiating the prefab the granchildren and beyond are still there, but I can’t edit those parts of the prefab. Is that a known limitation of Unity? Is there a standard way to deal with it? I’m guessing making prefabs out of each subtree would allow me to do what I want, but is that a recommended way of doing it?

This is a known limitation of the Unity Prefabs, nested prefabs are in the works for a future release.