Royal Tenenbaum explains to his three adolescent children, Chas, Margot, and Richie, that he and his wife, Etheline, are separating. Each of the children achieved great success at a young age. Chas is a math and business genius, from whom Royal steals money. Margot, who was adopted, was awarded a grant for a play that she wrote in the ninth grade. Richie is a tennis prodigy and artist who expresses his love for Margot through paintings. Royal regularly takes Richie on outings without the other children. Eli Cash is the Tenenbaums' neighbor and Richie's best friend. Also part of the Tenenbaum household is Pagoda, the trusted valet.
Twenty-two years later, Royal is kicked out of the hotel where he has been living. The children are in a post-success slump, with Richie traveling the world on a cruise ship, following a breakdown. He writes to Eli revealing his romantic love for Margot. Chas has become overprotective of his sons, Ari and Uzi, following his wife Rachael's death in a plane crash. Margot is married to neurologist Raleigh St. Clair, from whom she hides her smoking and her checkered past. Raleigh is conducting research on a subject named Dudley Heinsbergen, and diagnoses Dudley with Heinsbergen Syndrome.
Etheline's longtime accountant, Henry Sherman, proposes to her. Learning of Henry's proposal via Pagoda, Royal claims that he has stomach cancer to win back his wife's and children's affections. Etheline calls her children home, and Royal moves back in and sets up medical equipment in Richie's room. Royal learns of Chas' overprotective nature and takes his grandsons on an adventure involving shoplifting and dog fighting. On their return, Chas berates him for endangering his boys while Royal accuses Chas of having a nervous breakdown.
Eli, with whom Margot has been having an affair, tells her that Richie told him he loves her. Royal discovers the affair and objects to Margot's treatment of Raleigh, who confides to Richie his suspicions of Margot having an affair. He and Richie hire a private investigator to surveil her. Meanwhile, Henry investigates Royal's cancer claim and discovers his hospital had closed, his doctor does not exist, and that his cancer medication is only a jar of tic-tacs. He confronts Pagoda, Royal's partner in the scheme, and gathers the family to tell them that Royal has been lying about his illness. Afterwards, Royal and Pagoda are kicked out from the family home and into a gypsy cab.
Richie and Raleigh get the private eye's report on Margot, which reveals her history of smoking and sexual promiscuity, including a previous marriage to a Jamaican recording artist. Both men take the news hard, with Richie going into a bathroom, shaving off his hair and beard, and slashing his wrists in an attempt of suicide. Dudley finds him and Raleigh rushes him to hospital. As the Tenenbaums sit in the waiting room, Raleigh confronts Margot of her past, reveals that he knows she smokes, and then leaves. Richie checks himself out of the hospital and meets with Margot in his childhood tent to confess his love. They quietly cherish their mutual, secret love and they kiss.
Royal decides that he wants Etheline to be happy, and finally files for a divorce. Before Henry and Etheline's wedding, Eli, high on mescaline, crashes his car into the side of the house. Royal rescues Ari and Uzi just in time, but the boys' dog, Buckley, is killed in the collision. Enraged, Chas chases Eli through the house and wrestles him to the ground. Eli and Chas agree that they both need help. Chas thanks Royal for saving his sons and for buying them a Dalmatian named Spark Plug from the responding firemen as a replacement for Buckley. Forty-eight hours later, Etheline and Henry are married in a judge's chambers.
Some time later, Margot releases a new play inspired by her family and past events, Raleigh publishes a book about Dudley's condition, Eli checks himself into a drug rehabilitation facility in North Dakota, and Richie begins teaching a junior tennis program. Chas becomes less overprotective of his sons, and Royal seems to have improved his relationship with all his children, and looks to be on better terms with Etheline. He has a heart attack and dies at the age of 68. Chas accompanies him in the ambulance on the way to the hospital, and is the only witness to his death. The family attends his funeral, where the epitaph (which he wrote beforehand) reads that he "Died tragically rescuing his family from the wreckage of a destroyed sinking battleship."
