Gene Hackman won a Golden Globe for his performance and Wes Anderson and Owen Wilson's screenplay was nominated for an Academy Award.

Royal Tenenbaum (Gene Hackman) is explaining to his three children, Chas (Ben Stiller), Margot (Gwyneth Paltrow), and Richie (Luke Wilson), that he and his wife, Etheline (Anjelica Huston), will soon separate. The scene then evolves into a short explanation of how each child experiences great success at a very young age. Chas is a math and business genius, from whom Royal steals money. Margot is adopted, and was awarded a $50,000 Braverman grant for a play that she wrote in the ninth grade. Richie is a tennis prodigy and artist. He expresses his love for adopted sister Margot through many paintings. Royal takes him on regular outings, to which neither of the other children is invited. Eli Cash (Owen Wilson) is the Tenenbaums' neighbor, and Richie's best friend.

Twenty-two years later, Royal is kicked out of the hotel he has been living in since the separation. Meanwhile, all of the Tenenbaum children are in a post-success slump. Richie is traveling the world in a cruise ship following a breakdown; he writes a letter to Eli saying that he loves Margot romantically. Chas has become extremely overprotective of his two sons, Ari and Uzi, following his wife Rachael's death in a plane crash. Margot is married to a neurologist named Raleigh St. Clair (Bill Murray), from whom she hides her smoking and most of her checkered past. Raleigh performs tests on Dudley Heinsbergen, to research his strange disorder. Etheline's accountant, Henry Sherman (Danny Glover), proposes to her.

Being kicked out onto the street and given the news that Etheline is considering marrying Henry, Royal devises a plan to convince Etheline that he has stomach cancer in order to win her and his children's affections back. He tells Etheline of his "cancer", moves in, and sets up a large amount of medical equipment in Richie's room. Etheline calls each of the Tenenbaum children home. Royal learns of Chas' overprotective nature and decides to take his grandsons out on the town involving, but not limited to, shoplifting and dog fighting. Upon their return, Chas berates him for endangering his boys. Royal accuses Chas of having a nervous breakdown.

Eli, with whom Margot has been having an affair, tells her that Richie loves her. Royal discovers the affair and objects to Margot's treatment of Raleigh. Raleigh confides to Richie his suspicions of Margot and they hire a private investigator to spy on her. Henry observes Royal and decides to tell Etheline that he thinks that Royal may not have cancer. After a confrontation with Royal, Henry investigates him and discovers his hospital had closed years before, his doctor is fake, and that his cancer medication is just Tic Tacs. Henry then confronts Pagoda.

Henry gathers the whole family to tell them what he's discovered about Royal; after which, Royal and Pagoda leave. They then get jobs as elevator attendants. Richie and Raleigh get the private eye's report on Margot back. Upon hearing the report, Raleigh only comments on her smoking but the news has a much more profound effect on Richie. He goes into the bathroom, shaves off his beard and most of his hair, and calmly slits his wrists. Dudley finds him in a pool of his own blood, and Raleigh rushes him to the hospital. Soon after, as the Tenenbaums sit in the waiting room, Raleigh confronts Margot before leaving. Later, Richie escapes the hospital and meets with Margot. They share with each other their secret love and kiss.

Royal decides that he wants Etheline to be happy and has arranged for the two of them to sign divorce papers. Before Henry and Etheline's wedding, Eli, high on mescaline, crashes his car into the side of the house. He crashes through a window in the house, narrowly avoiding Ari and Uzi, whom Royal moves out of the way, but killing the boys' dog, Buckley. Enraged, Chas chases Eli through the house; when he catches up to him, the two wrestle and end up on the ground. Eli realizes that he needs serious help and Chas agrees that they both need help. Chas then thanks Royal for saving his sons. Royal buys a dalmatian from the firefighters that are at the scene for Ari and Uzi. 48 hours later, Etheline and Henry are married in a judge's chambers.

Time passes and Margot releases a new play based on her family. Raleigh publishes a book on Dudley's condition, Eli checks himself into rehab somewhere in North Dakota, and Richie starts a junior tennis program. Royal has a heart attack and dies; Chas is the only witness to his death. The family attends his funeral and leave together after the service.

The Tenenbaum children, all highly intelligent and disillusioned, are loosely based on the similarly disillusioned siblings from J. D. Salinger's Glass family stories, as director Wes Anderson revealed in a January 2001 interview with Premiere. The Glass children, seven child prodigies who turned into miserable adults, are the central subject of three of Salinger's four published books. The name Tenenbaum also resembles the married name of Beatrice "Boo Boo" Glass Tannenbaum. In one scene, Etheline Tenenbaum urges her daughter Margot to get out of the bathtub. A similar scene takes up a large part of Franny and Zooey, in which Bessie Glass spends quite a bit of time bothering her son Zooey.

Another key influence is Orson Welles' film The Magnificent Ambersons, the story of the moral and financial decline of the titular family. Additionally, the opulent Amberson house is central to the visual style of the film.