Just gave it another test and still no go.
I should have said this earlier, but here is how I'm syncing.
I synchronise Selected Playlists
Auto-sync settings are "Delete tracks not on list" and "Confirm Deletion"
My Music Files Template is:
<SortPrefix>\$Group($Sort(<Album Artist>),1)\$Sort(<Album Artist>)\$IsNull(<Year>,"[YEAR] ",[<Year (yyyy)>"] ")$IsNull(<Album>,ALBUM,$Trim(<Album>))\$IsNull(<Disc-Track#>,,<Disc-Track#>) - <Title>
To reproduce the issue I just renamed an Album to "<Album>Test" and synced my device. Sure enough, I get two folders, "<Album>" and "<Album>Test".
Is it because I'm using playlists to sync my device?
I'll try using the folders options if I can figure out how to do more than one folder.
Update:
Tried syncing only selected folders and still, the old sync folder is not being deleted.
Also, I tried removing the album. When it deletes the songs it removes the folder. So it's only an issue when the files move folders.