Sorry I didn't see this earlier... Cue, instead of running Xnest, I suggest you use Xephyr (which is what I use).

Take a look at the /usr/bin/xephwm5 script (in the chroot) to see how I run LXDE in a second display. You can modify that script to use any other desktop environment you like.

LXDE really is the best that I've found. Gnome is too heavy, KDE doesn't have tap-and-hold right-click support, and IceWM and xfce4 just aren't as nice (in my opinion).