According to one legend, Khedrup Kuenga Wangpo, son of Tertön Pema Lingpa was assigned to find a ridge resembling the trunk of an elephant.[He found one opposite Baeyul Khenpajong and mediated there. This location came to be known as Kurtoe Lhuentse Phodrang.

The monastery was originally established by Pema Lingpa's son Kuenga Wanpo in 1543, although it wasn't until 1654 that the Trongsa penlop (governor), Minjur Tenpa, built a formal dzong here after winning a battle and named it Lhuentse Rinchentse.The dzong was later restored in 1962 and again between 1972 and 1974.The historic importance of Lhuntse Dzongkhag is on account of its established link as the ancestral home of the Wangchuck Dynasty. Lhuentse town is the administrative capital of Lhuentse District, besides the Lhuentse Dzong. At present 100 monks reside here.

The Dzong is located in the Kuri Chhu valley, which is part of the Lhuntse district.The Kuri Chhu is the major river that has formed the scenic valley with high peaks and steep hills.Kuri Chhu is a tributary of the Manas River system, which is the largest river of Bhutan and a major tributary of the Brahmaputra River that drains most of Eastern Bhutan.

The road from Mongar to Lheuntse Dzong is a 3 hours drive over a distance of 77 kilometres (48 mi) and 63 kilometres (39 mi) from its junction at Gangola. The approach to this Dzong is over a flag-stone-paved path over the steep cliffs.