I am having the same problem in February 2020.
I create a Playlist Folder, then I create a few smart folders and put them in the playlist folder. When I restart Music, the playlist folder becomes a smart folder. I then can't add more subfolders to the new smart folder. At first the new smart folder contains all the songs held in the subfolders. At some point the new smart folder has all the songs in my library. If I edit the smart folder and make changes, it still holds all the song in my library, it doesn't change anything.
If I do the above procedure, save it as an XML file, erase the original and load the XML file as a playlist, again the playlist folder becomes a smart folder that I can't add new subfolders to. However, I can move subfolders out of the original folder just not in. If I create a new playlist folder and move the subfolders to the new folder, the new playlist folder soon becomes a smart folder.
Also, my view settings change a lot. I prefer to view "as songs". I also don't need a bunch of columns like "love" and I prefer to order by artist. Music forgets all of those settings a lot. Why can't I set as default that when I create a new folder, it has the view, columns and orders I prefer? I have a lot of playlists and every time I create new ones I go through this pain in the *** resetting everything.
This is a serious bug. Please tell me Apple knows about this and is working on a fix as I write.
I am on a 2018 Mac Mini, Catalina 10.15.3
Thank You