how do you guard against it? Do you ban kids from
  enrolling in or applying to colleges in which
  their parent's (or close relative) has donated to?

Obviously, people's opinion on that will depend on their opinion on things like admissions essays and extracurricular activities; anything like "I learned a good work ethic helping my father with his senate campaign" will have to go.

Blind grading after admission would be sensible too, for the same reasons. Although perhaps difficult in subjects where individual students' work was identifiable even without their name.