yep, they breed with relatives.
you will notice when they do, the offspring stats will be very low, and a lot of the time, infertile, it is quite annoying they didnt add a family tree in for beta, i think its rather needed for a game like this, i really hope we have a family tree in the 'stud book' on release.
As a side note, i personally started to add numbers to names, eg
[1 - J-K] Mia
[2] Jack
[3] Hidori
the numbers for me mean generation. the letters are who the parents are [example is the first one, dad: Jake .. Mom: Kiri ... so first letter of each parents name]
it helps with stopping parent - child breeding, but is not a solid system.