Inheritance of phenotypic traits depends on two key events: replication of the determinant of that trait and partitioning of these copies between mother and daughter cells. Although these processes are well understood for nucleic acid-based genes, the mechanisms by which protein-only or prion-based genetic elements direct phenotypic inheritance are poorly understood. Here, we report a process crucial for inheritance of the Saccharomyces cerevisiae prion [PSI(+)], a self-replicating conformer of the Sup35 protein. By tightly controlling expression of a Sup35-GFP fusion, we directly observe remodeling of existing Sup35([PSI+]) complexes in vivo. This dynamic change in Sup35([PSI+]) is lost when the molecular chaperone Hsp104, a factor essential for propagation of all yeast prions, is functionally impaired. The loss of Sup35([PSI+]) remodeling by Hsp104 decreases the mobility of these complexes in the cytosol, creates a segregation bias that limits their transmission to daughter cells, and consequently diminishes the efficiency of conversion of newly made Sup35 to the prion form. Our observations resolve several seemingly conflicting reports on the mechanism of Hsp104 action and point to a single Hsp104-dependent event in prion propagation.