calibre is unable to create collections for the Kindle Touch at this time. For other Kindles there is a
Kindle Collections plugin.
No, you cannot create sub-collections on a Kindle.
My workaround for this problem is to have some collections by genre and others by author. If I have 8 Dickens novels that I want grouped, I put them in a Dickens collection. Books can be in more than one collection, so it's up to you whether or not you leave them in Classics as well.