diff --git a/editor/src/messages/portfolio/document/document_message_handler.rs b/editor/src/messages/portfolio/document/document_message_handler.rs
index 5d6d0648..93d81bd7 100644
--- a/editor/src/messages/portfolio/document/document_message_handler.rs
+++ b/editor/src/messages/portfolio/document/document_message_handler.rs
@@ -2859,4 +2859,43 @@ mod document_message_handler_tests {
 		editor.handle_message(DocumentMessage::CreateEmptyFolder).await;
 		assert!(true, "Application didn't crash after folder move operation");
 	}
+	#[tokio::test]
+	async fn test_moving_folder_with_children() {
+		let mut editor = EditorTestUtils::create();
+		editor.new_document().await;
+
+		// Creating two folders at root level
+		editor.handle_message(DocumentMessage::CreateEmptyFolder).await;
+		editor.handle_message(DocumentMessage::CreateEmptyFolder).await;
+
+		let folder1 = editor.active_document().metadata().all_layers().next().unwrap();
+		let folder2 = editor.active_document().metadata().all_layers().nth(1).unwrap();
+
+		editor.drag_tool(ToolType::Rectangle, 0., 0., 100., 100., ModifierKeys::empty()).await;
+		let rect_layer = editor.active_document().metadata().all_layers().next().unwrap();
+
+		// First move rectangle into folder1
+		editor.handle_message(NodeGraphMessage::SelectedNodesSet { nodes: vec![rect_layer.to_node()] }).await;
+		editor.handle_message(DocumentMessage::MoveSelectedLayersTo { parent: folder1, insert_index: 0 }).await;
+
+		// Verifying rectagle is now in folder1
+		let rect_parent = rect_layer.parent(editor.active_document().metadata()).unwrap();
+		assert_eq!(rect_parent, folder1, "Rectangle should be inside folder1");
+
+		// Moving folder1 into folder2
+		editor.handle_message(NodeGraphMessage::SelectedNodesSet { nodes: vec![folder1.to_node()] }).await;
+		editor.handle_message(DocumentMessage::MoveSelectedLayersTo { parent: folder2, insert_index: 0 }).await;
+
+		// Verifing hirarchy: folder2 > folder1 > rectangle
+		let document = editor.active_document();
+		let folder1_parent = folder1.parent(document.metadata()).unwrap();
+		assert_eq!(folder1_parent, folder2, "Folder1 should be inside folder2");
+
+		// Verifing rectangle moved with its parent
+		let rect_parent = rect_layer.parent(document.metadata()).unwrap();
+		assert_eq!(rect_parent, folder1, "Rectangle should still be inside folder1");
+
+		let rect_grandparent = rect_parent.parent(document.metadata()).unwrap();
+		assert_eq!(rect_grandparent, folder2, "Rectangle's grandparent should be folder2");
+	}
 }