Thank you for contacting Telerik Support.
Unfortunatelly to achieve what you are looking for with categories requires redesigning and architecturing the categories functionality from scratch, currently categories are on a flat structure. There would be no quick fix for this in the current versions of Sitefinity 3.x. Unfortunately you will have to stick to the current method that you are using.
However I have good news - Sitefinity 4.0 will take completely different approach to the issue and categories will have hierarchical design and what you are asking for is already in progress.
the Telerik team