Permafrost covers approximately 24% of the Northern Hemisphere, and much of it is degrading, which causes infrastructure failures and ecosystem transitions. Understanding groundwater and heat flow processes in permafrost environments is challenging due to spatially and temporarily varying hydraulic connections between water above and below the near‐surface discontinuous frozen zone. To characterize the transitional period of permafrost degradation, a three‐dimensional model of a permafrost plateau that includes the supra‐permafrost zone and surrounding wetlands was developed. The model is based on the Scotty Creek basin in the Northwest Territories, Canada. FEFLOW groundwater flow and heat transport modeling software is used in conjunction with the piFreeze plug‐in, to account for phase changes between ice and water. The Simultaneous Heat and Water (SHAW) flow model is used to calculate ground temperatures and surface water balance, which are then used as FEFLOW boundary conditions. As simulating actual permafrost evolution would require hundreds of years of climate variations over an evolving landscape, whose geomorphic features are unknown, methodologies for developing permafrost initial conditions for transient simulations were investigated. It was found that a model initialized with a transient spin‐up methodology, that includes an unfrozen layer between the permafrost table and ground surface, yields better results than with steady‐state permafrost initial conditions. This study also demonstrates the critical role that variations in land surface and permafrost table microtopography, along with talik development, play in permafrost degradation. Modeling permafrost dynamics will allow for the testing of remedial measures to stabilize permafrost in high value infrastructure environments.