Arsenic and Old Lace opens in the living room of the Brewster home, inhabited by two spinster aunts, Abby and Martha Brewster, and their nephew, Teddy. Rev. Dr. Harper is chatting with Abby about her other nephew, Mortimer, who in love with the reverend’s daughter, Elaine. Soon joining the conversation are two friendly police officers, Brophy and Klein, who have come by (as they often do) to pick up a box for charity from the kindly Brewster sisters. Theodore, who is rather crazy but harmless, thinks he is Theodore Roosevelt and charges up the stairs to retrieve the box.
The reverend and the policemen leave, only to be replaced by Mortimer, who announces to his aunts that he intends to marry Elaine, whom he is taking to a play that evening.
However, the happy family starts to unravel when Mortimer lifts the lid to the window seat and discovers a dead body within. He immediately assumes that Teddy has killed the man. However, Abby and Martha tell Mortimer that it was they who poisoned the man with their homemade elderberry wine—and that he is the eleventh (or twelfth, depending on how you count) gentleman they have shared their wine with. The sisters explain that these are charitable acts: They befriend lonely older gentlemen who do not have much to live for and then kill them with elderberry wine laced with arsenic. They continue that Mortimer should not worry because Teddy is down in the cellar digging what he believes is the Panama Canal, but is in reality the latest grave.
Just then Elaine arrives and an exited and worried Mortimer tells her they are not going to the theatre afterall. After a brief quarrel, Elaine leaves.
About this time, Mortimer and Teddy's brother, Jonathan, shows up. Jonathan, a true maniacal criminal, is accompanied by Dr. Einstein, a plastic surgeon of doubtful character. Dr. Einstein has changed Jonathan so that he looks like Boris Karloff, the horror film star.
Teddy invites Einstein to join him in the cellar, where he is supposedly digging the Panama Canal. Einstein quickly returns and confides to Jonathan that there is a hole large enough to bury Mr. Spenalzo (a man Jonathan recently killed) after everyone goes to bed. Once the lights are out and everyone is supposedly asleep, Teddy goes to the window seat to get Mr. Hoskins, and Jonathan and Einstein go to their car to get Mr. Spenalzo, both planning on filling the hole in the cellar.
Thus begins several hilarious scenes of lights blinking on and off, of bodies being moved from the window seat to the cellar to the car outside, and of accusations and threats back and forth.
Because of the commotion at the house, Officer O'Hara stops by to make sure all is well. When he is convinced that everything is alright, he shifts topics and corners Mortimer in a discussion of a play he is writing.
Just then, Lieutenant Rooney bursts in and recognizes Jonathan as an escapee from a prison for the criminally insane. Jonathan tells the officers about the bodies in the cellar, but they don't believe him and take him off to prison. Einstein gets away, and Theodore is certified insane and taken to the Happy Dale Sanitarium.
Trying to protect society without sending his aunts to prison, Mortimer ecstatically agrees when his aunts insist on going to Happy Dale with their nephew. The aunts then kindly inform Mortimer that he is actually not a member of the Brewster family. He was an illegitimate child and thus can marry Elaine without fear of passing the Brewster insanity on to his children. Mortimer happily departs, but before the women leave their house, they offer a drink to the head of Happy Dale, Mr. Witherspoon. Witherspoon is a lonely older gentleman, and he gladly accepts a glass of the spiked elderberry wine. . . .